The elastic has finally snapped. The tension between private equity groups’ continuing desire for a low profile and their increasingly high-profile activities has become too great. The past two weeks have provided fresh evidence of buy-out groups’ ambition and the opposition it can arouse. An effective response requires private equity to abandon its reclusive habits.
Buy-outs are getting bigger. Just a week ago Blackstone won a bitter takeover battle to acquire Equity Office Properties for $39bn – the largest leveraged buy-out on record. They are also venturing into the heart of national life. A trio of private equity firms is circling J. Sainsbury, one of Britain’s biggest food retailers. Animosity towards private equity is growing, too. In the UK, a trade union-led campaign has combined with posturing ahead of the contest for the deputy leadership of the Labour party to turn up the heat on the large buy-out firms. In particular, the GMB union is urging MPs to support the scrapping of corporate tax relief for interest payments on loans.
The politics is dispiriting. With weeks of campaigning among Labour MPs still to come, we can expect more demagoguery. It is at least reassuring that the Treasury says it will not be bounced on the question of tax relief. Of course the relief matters particularly in leveraged buy-outs, but private equity firms are not the only ones to benefit. There is certainly scope for a tax policy debate about the relative treatment of debt and equity: an atmosphere of visceral hostility towards private equity is not conducive to informed choices.
There are signs, though, that private equity is listening. Damon Buffini, managing partner of Permira, Europe’s largest private equity firm, has proposed a meeting with the GMB union. This is a welcome first step toward engagement with critics, not all of whom are agitators targeting favourable borrowing terms as well as their lucrative fees.
The next step is for all these high-earning firms to recognise what comes with entering the mainstream. This requires them to change in two ways. First, where a firm buys a national icon or a large employer, it must accept that it cannot behave as if its actions in restructuring the business have no wider impact on the community.
More generally, the industry needs to get better at justifying what it does. It should be prepared to tackle criticism that the improved performances firms can achieve from the companies they buy come not primarily from brilliant management, but at the cost of riskier positions for creditors, employees and pension funds.
Buy-out firms have learned the hard way that a reputation for asset-stripping is easier to gain than to lose. To prevent its new-found wealth and respectability being jeopardised, it is time for private equity to address its public.