What are the fee earners saying

Anyone completely new to the subject might have surmised from national newspaper coverage that private equity in the UK is carried out by a middle-aged gentleman called Damon who used to live on a council estate, not by an industry that invested €50.3bn (US$66.3bn) of equity capital in Europe in 2006 and lined the top 10 investment banks’ pockets with US$2.28bn in those 12 months, up from US$1.59bn in the previous year.

Given that private equity is now making, or considering making, plays for big high street names such as Sainsbury and Boots, the debate on whether the industry is a “White Knight” or “The Bogeyman” is likely to continue – in fact, one senior industry figure suggests that the recent furore was partly derived from initial bid rumours for Sainsbury colliding with the GMB union’s continued attack on Permira over “asset-stripping” at the AA.

However, it is fair to say that criticism of private equity has been building for at least a year. The massive hike in fund sizes and progressively bigger and more public bids has generated more newspaper copy on the industry than ever before.

Even so, partners at an Ernst & Young debt workshop last week warned in advance that any questions about the current debate would result in “dull answers” – chiefly because it involved discussing their clients.

However Oliver Tant, head of private equity at KPMG, says that “private equity needs to accept that its profile has risen dramatically and it has to engage much more with the broader community”, something that Peter Linthwaite, chairman of the BVCA, says will happen with the formation of its working group chaired by Sir David Walker, former chairman of Morgan Stanley.

The BVCA’s move is in contrast to a paper published last April. Despite having the appealing title Private Equity – a UK Success Story, the report was mainly intended to win favour with regulators and investors, not the public at large.

Linthwaite says the industry needs to recognise the “issue of disclosure and transparency in high profile transactions where there is a wider stakeholder base and concerns if a company like Sainsbury disappears from the public market”.

Simon Witney, a partner at European law firm SJ Berwin, agrees that the industry needs to be more forward facing, but says that “it is often not clear what people are asking for, and what their problem is with private equity. That’s partly because people have different agendas, and partly because some have not thought through their demands properly. For example if you’re talking about disclosure, lots of funds do disclose details of their returns and the general public does not take any notice – And why should they? What interest is there for someone who has no ability to invest into a private equity fund”.

The issue of stakeholders, rather than shareholders, is also a key one for Witney as regards potential big deals such as a possible takeover of Sainsbury.

“You have to engage with all of a company’s stakeholders and help them understand what your plans are for the business,” he says. “In one sense every single person in the country has a stake in a company like Sainsbury’s. Even if you don’t work for it, don’t supply it and you shop in Tesco, the price of your baked beans is affected by the competitive environment Tesco operates in, so of course it matters what happens to it. But the law already recognises and protects those interests in a wide variety of ways, and those laws apply whoever owns the company and whether it’s public or private.”

Increased criticism fuelled by confusion about what private equity is and wants could lead to a knee-jerk reaction from regulators, says a spokesperson for a major investment bank – one that generated about US$310m from financial sponsors in Europe last year alone.

“It would be bad for the city if private equity was stopped from going about its business,” says the spokesperson. “For one thing, it could force private equity companies offshore and a lot of ancillary services, including banks, would go with them.”

A major part of how this can be avoided will be in how private equity manages the message.

“It’s not necessarily about Ebit multiples or even the price paid; it’s about the relationship between the target company and society,” says Linthwaite, adding that this only refers to the very big transactions, and not mid-market or growth capital deals; but is applicable to all takeovers, not just private equity; and would be more about objectives and how they would be achieved rather than commercially sensitive information.

Brendan McMahon, private equity leader at PricewaterhouseCoopers, says that private equity is “by nature much more conservative than corporate Britain”. It is, however, frequently a question of public image and, by extension, whether the public likes you.

“What do you know about Philip Green or what he does with his money?” adds KPMG’s Tant. “Where is the call for openness there? There is a feeling he is doing good because he engages. The private equity industry hasn’t so far.”

The private equity industry might not need hilariously unsuccessful attempts to balloon around the world (and attempting to buy the National Lottery is probably a big no-no), but improving its image – even having a face to associate with could be a start to reinventing private equity’s public persona.