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RUTH SUNDERLAND: In league with the private equity buyout boys

RUTH SUNDERLAND: Unscrupulous private equity practitioners would have far less opportunity to get rich at our expense were it not for their greedy, lazy or naïve accomplices

  • Private equity expanded in the early noughties – at that time, there were attempts to hold the industry to account
  • Then the financial crisis struck, and the task was abandoned – we need to finish the job
  • Large investors are increasingly preoccupied with ‘ESG’ issues such as climate change – this should include piratical private equity that is wreaking harm

The campaign in this newspaper against ruthless private equity has focused on the activity of predatory buyout barons, but they are not the only ones to blame. 

Other culprits in the pandemic plundering include venal boards of directors and the short-sighted City shareholders who roll over and sell out. The lure of the private equity pound is often overwhelming. 

A takeover – by any bidder, not just private equity – triggers incentive payouts at the top. The prospect of up to eight-figure payouts can play havoc with objectivity on whether accepting a deal is right. 

Money talks: The prospect of up to eight-figure payouts can play havoc with objectivity on whether accepting a deal is right 

Even at a mutual, where the interests of members are meant to be paramount, boards can behave in questionable ways. 

Management at mutual insurer LV= has been savaged by an all-party parliamentary group for lack of transparency over why they accepted a £530m bid from US private equity group Bain. Inexplicably, the board spurned an offer from Royal London that would have preserved its mutual status. The directors are not in line for direct pecuniary rewards as the £530m is to be shared among members. But they might well receive higher pay and bonuses if they are kept in post by the new owners – and a big golden goodbye beckons if not. 

We are all affected by this deal because losing one of the few remaining large mutual insurers reduces choice and could result in higher premiums for policyholders. 

City institutions that love to present themselves as responsible long-term investors have been all-too-ready to grasp at private equity bids. 

This is despite the fact values have been depressed in the pandemic and these supposedly good stewards might be sacrificing bigger profits down the line for the sake of a bundle of cash now. 

There has been some protest: leading fund manager M&G has criticised the £2.8billion bid for UDG Healthcare by US private equity house Clayton, Dubilier and Rice as too stingy. Nonetheless, there is concern that UK firms are being sold on the cheap. 

Mainstream City shareholders are also leaving a door open for private equity by failing to take boards to task for underperformance.

Companies can be turned around without the intervention of private equity or activists, and this can be done on public markets. 

It’s just that the big investors are often ineffective in their engagement with boards. Pension funds and other institutional shareholders are in a powerful position to change the behaviour of the buyout boys. They are big investors in private equity funds and could stipulate ethical and financial standards to curb the worst practices, such as loading firms with debt and extracting large dividends on borrowed money. 

Large investors are increasingly preoccupied with ‘ESG’ or environmental, social and governance issues such as climate change. This should include piratical private equity that is wreaking harm. 

They should cast a beady eye on fees. Private equity has come under attack from a group of retired teachers in Ohio, who claim their pension fund is paying high fees for lacklustre returns. Protests like these may well be a taste of things to come. 

Private equity expanded in the early noughties. At that time, there were attempts to hold the industry to account. Then the financial crisis struck, and the task was abandoned. We need to finish the job. Unscrupulous private equity practitioners would have far less opportunity to get rich at our expense were it not for their greedy, lazy or naïve accomplices.   



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