The buzzword of the moment is of course transparency, followed closely by disclosure. But what does this mean? What do the unions, the politicians and the public at large actually want from private equity firms?
Surely we are not talking about financial disclosure. The public is not allowed to invest directly in private equity funds as they are illiquid investments and therefore deemed unsuitable for retail investors.
Many people do have indirect exposure to the asset class through their pension funds, and if they want information they can get it from their fund managers, who have direct access to as much information as is really necessary.
Then there is transparency – are we talking here about accountability to wider stakeholders in the business, suppliers and employees?
There are regulations governing public companies that do make them more “transparent” perhaps – but this is only to their shareholders. This is because shareholders in public companies are a more dispersed group than those found in private companies. In private companies there is less need for transparency because the shareholders tend to work far more closely together.
When it comes to stakeholders, the regulations in place protecting them are the same for public and private companies. Is the argument that private equity-backed companies should somehow be more highly regulated with regard to stakeholders than their public counterparts?
The backlash against private equity at the moment is political, not economic, and appears to be grounded in ignorance. A classic example, of course, is that the GMB union has repeatedly confused buyout funds with venture capital, two very different things – with the latter being something that the leftist of left have always supported.
The worrying thing is that this political backlash could actually have a detrimental effect on the economy and ironically do more damage to potential dependent stakeholders in the long run.
The Treasury last week announced a review of the tax relief given on shareholder loans in highly leveraged deals.
If there are more restrictions on tax deductions, this could have an adverse effect on companies wishing to expand and develop and could hit productivity and employment.
Further evidence from 1,350 UK buyouts between 1999 and 2004 showed employment dipping initially and then rising by an average of 21.4% on pre-buyout levels over four years.