Monday, 19 February 2007

Paul Myners on private equity

An interesting letter from Mr Myners in the latest issue of the New Statesman. The article he was replying to can be found here.


19 February 2007

Private dangers

Peter Wilby (Wilby's World, 12 February) will no doubt prompt those in the private equity world to respond with many stories of the declining companies rejuvenated, new jobs created and productive investments made. But such allusions to past successes will not reflect the likely outcome of the debt binge that characterises much private equity activity today, typified by the contemplated takeover of Sainsbury's.

Private equity, as we see it in acquisitions of large public companies, is almost entirely a function of exploiting tax breaks on interest payments. Over the past few years, it has thrived in benign economic conditions on the back of rising debt and the returns that this has generated. This is little different from buying a house with a wafer-thin deposit. Private equity and the banks financing it have been paid for the risks taken. But employees of private-equity-owned companies get no additional reward for the increased risk attached to their employment. And yet employees will, in some cases, pay the price for this reduced security through loss of jobs or reduction in pensions. One in six of all private sector employees now works in an private-equity-financed business, and even more are exposed, if you count suppliers or customers.

Several steps should be taken. First, private equity companies, which are highly secretive, should be obligated to maintain the same standard of reporting as is required of all companies. Second, pension-fund trustees and other investors should wise up to the huge sums being earned by intermediaries from the movement of money from publicly quoted companies to private equity.

Third, those who lead public companies should show greater conviction when making the case for accountable public ownership and investment for the long term rather than selling for a quick buck.

Paul Myners
London SW3

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