Private equity leading the new gold rush

Greed is good. Greed is right; greed works. You don’t need a Gordon Gekko to spell this out. And greed could not come in a better package than the private equity industry, with the promise of piles of cash. Completely understandable, then, why everyone wants to be a buy-out king and join the private equity marauders besieging the stock market.

The industry has lured the likes of Pepsico’s Martin Glenn and Coca Cola’s Mary Minnick, and has already become a buzzword for both marketers and advertising executives without a job these days. Agencies such as M&C Saatchi, never known to throw away a good opportunity, has created a bespoke shop designed to cater for the faster decision-making of the private equity-owned businesses. And though accused of being locust-like when it comes to stripping assets or stuffing companies full of debt and getting rid of half the workforce, this approach is now being copied by publicly-owned Cadbury Schweppes which is culling 15% of its workforce – equivalent to more than 7,500 – and has shed its US drinks business as a means to cut costs.

So while everyone wants to join in this almost wild exuberance of spending and amassing billions of pounds, the time has come for some awkward questions. It has come under the scrutiny of Treasury select committee, which has set up an inquiry to explain the private equity business model. Today (Wednesday) five top private equity figures will come under fire over the “unfair” tax breaks granted to this sector, following the comments made by SVG Capital chairman Nicholas Ferguson on the issue of buy-out executives paying “less tax than a cleaning lady”. The tax break, a long-established discrepancy of the system, is to do with the gentler tax system of capital gains than annual income. In Britain, those who hold an investment for two years can pay 10% on the gains, compared to a 40% rate of income tax.

The criticism on the tax break aside, there is the other issue of corporate social responsibility – or lack of it. Private equity, committed primarily to driving greater efficiencies, has not been known to be terribly transparent about its business practices and CSR is not an issue that therefore tends to be taken seriously. Hilary Benn, the international development secretary and a contender in Labour’s deputy leadership contest, this week demanded the industry show “social responsibility”, while urging private equity executives not to be obsessed with easy profits by stripping down businesses. His comments follow the likely sale by Ford of its Land Rover and Jaguar brands, which has so far failed to ignite any interest from rival car manufacturers but has private equity players queuing outside its doors.

So while there have been classic examples of private equity victims such as Debenhams, which recently issued its third profits warning, and even the AA, whose takeover by Permira in 2004 has been dubbed as corporate bullying by the GMB trade union after one-third of its workforce lost their jobs, the industry continues to defend itself. It sees itself as the great messiah for the UK economy, having done it a great favour by encouraging entrepreneurship and investment. It has also maintained that private equity’s job is to manage change, and therefore the painful process of slashing costs and cutting jobs. But then not everyone is moaning about big bucks hurting everyone else. The industry is not short of good stories to tell such as Iceland. And presumably some interesting opportunities for marketers when private investors want to take control of a brand.

Minnick, who joined Lion Capital, and Glenn, chief executive of the now private Birds Eye have already led the way. The industry might be losing the argument on its merits, but for all those aspiring to greatness, while realising their avaricious dreams, the lure of private equity will always be just too good to resist.

Sonoo Singh, News Editor

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