Sunday, 25 November 2007

Sunday's news...

A couple of bits and bobs from the business pages today, and then some more blurb on private equity. On the Northern Rock front it looks like Warren Buffet might be about to make an appearance, lining up behind the private equity bid by the looks of it too. Also in the Torygraph is an interview with Richard Lambert, head of the CBI and former editor of the FT. He has a few interesting things to say. He argues that although the economic situation is looking rough at the moment, it's not a patch on the 70s, though that is not much comfort. And his comments on Northern Rock situation are worth a read:

"There are no good solutions, merely least bad solutions."

Which reminds me of JK Galbraith's famous line:

"Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable."

Over on The Observer there is a half-decent interview with Sir David Walker about his recent review of transparency in the private equity industry. I agree a bit with some of things he says. This is a bit of a step forward, and it is being watched by other countries. However I think his argument in defence of not requiring private equity partners to disclose details of their pay is weak:

"[D]irectors' pay in public companies is there to protect owners; to stop managers ripping off the shareholders and feathering their nests. A typical FTSE 100 company has around 150,000 shareholders, so the only realistic way to make that information available to all the owners is to publish it. In private equity there are typically only 150 owners and they have a total flow of information, so you don't need to make it publicly available."

I think this is a false distinction between public and private companies for a number of reasons.

First, the disclosure of exec pay in public companies is not simply an argument about addressing agency problems, it is part of a much wider debate about relative rewards within society. I think one of the reasons that there is still much debate about exec pay in the UK is that seeking to 'solve' or at least take the sting out of the issue by locating responsibility for exec pay in the company-shareholder relationship has, to be honest, failed.

Second, the issue of disclosure of pay in public companies demonstrates that making information widely available can help address the failings of a shareholder-driven approach. In the case of one big pay vote this year that I am aware of corporate governance watchers on the investor side were actually alerted to something by the press. If the info in private equity firms is only disclosed to limited partners there is no scope for the press to play such a role.

Thirdly, as explored in my post on Friday about agency problems, LPs are actually in a very weak bargaining position with private equity houses presently. I wonder if there has ever been a case of LPs telling GPs they need to pay themselves less?

Notably Walker is also positive about his call for the BVCA to produce better data on PE's economic impact as he says "I believe private equity is very positive for the UK economy". Funnily enough an academic I spoke to last week who has looked at quite a bit of the evidence to date, and has no particular axe to grind, reckoned that any serious analysis of the impact on employment would probably show a small negative one. Either way it has to be a good thing that more serious data is made available.

To finish off, we need to be aware of how studies of PE might seem to suggest things that aren't really there. For example, if a company sheds jobs following a PE takeover is that because of the nature of ownership, or because it was in trouble anyway? Studies seem to show that management buy-ins (ie new management coming in from outside) have a greater negative impact on jobs. But PE firms wil argue that if it is an MBI (rather than existing management buying out) that suggests that there was a problem there already.

Flip it around and you see the problem with some of the happy-clappy talk about PE as a job creator (see the Torygraph business comment pages for most of this year for examples). But a lot of the high-profile PE activity recently has been leveraged buyouts of large, successful companies. If they continue to expand and create jobs is that because of PE, or did PE just ride on the coat-tails of a decent existing business?

Which brings me back to the point about attribution analysis that I flagged up in my previous post about Walker. The more I think about it the more I think that this is the real missed opportunity of the Walker Review (if you accept that it was never going to address the real issues that TUs have with PE). By letting PE firms not disclose this (which I understand is commercially sensitive) it will allow them to argue that they achieve their returns through better management - whether this is true or not.

A push for disclosure of this info would also line up with investor concerns about PE since if it is gearing that is really driving returns then they are surely unsustainable. So how about it?

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