I feel this evidence is strong enough to conclude that PE buyouts catalyse the process of creative destruction in an economy. Or, perhaps more aptly, we could characterize this evidence as a demonstration of ‘destructive creation’ whereby jobs are lost, costs are cut then other (more productive) jobs are created on the back of the loss (Weissmann, 2012). I would also like to draw attention to a figure I cited earlier, that is, the b value in the research conducted by Popov & Roosenboom. It suggested that PE finance was 2.6 times more effective in increasing productivity than the control firms in the study. Hence, given widely accepted economic theory in this sector, we can say that we would expect employment to decrease anyway in the short run as an increase in productivity means less people are needed to produce a certain level of output. The effects on employment in the long run though are yet to be confirmed by data, although based on my arguments I would expect them to be positive. It would be impossible to carry out a meaningful discussion by solely concentrating on the stated 3 entities; PE firms, public finances and pensions. In order to accurately gauge the impact that PE firms have on society, it is important to constantly apply the reasoning and link the impacts back to the UK taxpayer who is probably worried about their pension. PE as an industry, as previously stated, has had a lot of grief from the media and general public of late. The main concern is that the rewards (indeed only if there are any) are being split in an inegalitarian manner, with the vast majority of profits going to GPs whilst very little benefit is being felt by target firm employees who are often exposed to low job security during a PE firms reign at the helms. What is worth bearing in mind though at this point is that GPs ‘only’ take home 20% of the profit, as mentioned before, which means the other 80% of profits (directed at LPs) could in some way be being felt by employees country-wide. PE firms often jump to their own defence when these issues are raised by claiming that pension funds are large investors and hence the profits made by PE firms are benefiting the average British worker via healthier pension payouts. Unfortunately, this is not quite the case. Taking Permira’s most recent funds, Permira IV & V, as an example, 36% of investment in the £7.8bn fund that started in 2006 (Permira IV) and 39% of the £4.5bn Permira V (that hasn’t paid out yet) fund came from pension schemes (Permira, 2012). Given the profits they make (generally on the scale of 40-60% of an investment depending on the economic climate) this seems to imply that quite a healthy pile of cash will directly make a contribution to the happy retirement of UK workers. However, again there is a downside. Research by the British Venture Capital Association shows that between 2002 and 2008 over 70% of funds flowing into UK PE firms came from foreign institutions (Peston, 2008). This means that only roughly 10% vi of the benefits derived from Permira IV increasing its portfolio companies’ EBITDA vii by 12% per year and sales by 11% per year (Permira, 2012) was felt by UK pension holders. Robert Peston summed this effect up succinctly in his book ‘Who Runs Britain?’ saying ‘the purchase by private equity of British businesses represents a transfer of ownership to foreign interests’ 4 . What is worth mentioning though is that this is largely not GPs fault, they can’t make pension funds invest. Instead, it is the UK pension fund managers who are possibly more to blame. Their (rightly) cautious attitude towards millions of peoples savings meant they generally lacked confidence in this unpopular industry, what must also be considered though is the fact that they are more reluctant than their American counterparts to hire executives to carry out the time consuming (and hence expensive) task of monitoring the performance of PE funds. Furthermore, pension funds tend to be wary of short term measures of success like quarterly or yearly performance, contrary to PE firms in their approach to business, as they rely on new companies or individuals investing in their fund on a continuous basis. Thus, the high levels of debt that PE firms often operate with can be a major worry for pension funds, which is a pity for UK workers as the value of any business, at least in the long run, is not affected by their levels of debt. Hence, UK pensioners could have a more lavish retirement if pension funds were a little more forthcoming to the PE industry. The 3 Conflicting Ps; Private Equity, Public Finances and Pensions
4 Robert Peston – Who Runs Britain? – p.49 – 2008
116
Made with FlippingBook - Online Brochure Maker