Apologies for a light day; some family demands took precedence. Hope to have a more normal series tomorrow.
A item in today’s Financial Times, “Unions vow to fight the ‘cancer’ of hedge funds,” may seem to be old news, labor versus capital, but there are some new elements in this story.
First, the unions have the wind behind them, at least in Europe. The public at large is not keen about hedge funds and private equity, and the antipathy is rising. Remember that many are US based, and private equity funds have also not been as successful abroad as here.
Second, the unions are attacking the private equity (and hedge fund) claim that they are good for the economy, and instead charges that they are a “cancer on the job creation system.” If they muster the data to back their charge, it could lead to an informative and revealing discussion.
After all, what do private equity firms really mean when they say they are good for the economy? Presumably, that means that they increase GDP more than it would have grown without them. That means revenue growth, not profit growth. But PE firms care more about bottom line than top line, and in some (many?) cases, their improvements in results are achieved primarily through cost cutting (which could have been done without the involvment of these firms). The unions have every right to be upset if financial cowboys are making fortunes by firing workers. So pushing the PE players to be more precise, and more factual, about their claims will be instructive.
Third, despite their inflammatory rhetoric (this is Europe, after all) their demands aren’t unreasonable. They are asking primarily for transparency. The notion is that these financial concerns have gotten too big and powerful to operate behind a veil of secrecy. Other big financial players are regulated; what makes them so special? This isn’t a crazy argument at all. Even Yale professor Jeff Garten, in a recent FT editorial, “Private equity can help itself – and the public” (excerpted below), argued that private equity firms would do themselves a favor to make more disclosures. And better that they volunteer to be more open rather than have it forced upon them.
First from today’s story:
European trade union leaders began plotting a concerted campaign against the “cancer” of private equity and hedge funds yesterday, including a boycott by workers’ pension funds.
Seeking to exploit the recent shift in political sentiment against private equity in the US and Europe, the union bosses promised to accelerate their fight against the contentious financial groups. Meeting at the headquarters of the Organisation for Economic Co-operation and Development in Paris, they announced plans to publish their own data to contest private equity’s job creation claims…
They are due next month to meet Angela Merkel, Germany’s chancellor, who is chairing the Group of Eight industrial nations, to push for international rules making private equity and hedge funds pay more tax, become more transparent and face tougher regulation.
John Monks, general secretary of the European trade union confederation, accused private equity of being a “black box” lacking transparency. “I don’t see why they should not be regulated like any other financial services companies. It is the same on taxation: why should they get a special deal?”
“A lot of us are concerned that this is a cancer eating away at the job creation system,” said John Evans, general secretary of the Trade Union Advisory Committee, which advises the OECD….
Last year’s election of a Democrat-controlled Congress meant there was more political appetite in the US to tackle the issue of private equity and hedge funds, he said, adding: “If they have such a good story to tell, then they should come out from under their stone and tell it,” he said.
And from Garten:
Private equity firms have been accused of asset stripping in Europe and anti-competitive activity in the US, with additional charges of improper tax treatment of partners’ incomes now arising in Washington. That is why several big American private equity firms, such as Blackstone, Texas Pacific, KKR and Carlyle, created their own trade association in Washington last December – the Private Equity Council. For similar reasons, earlier this month, the British Private Equity and Venture Capital Association launched a task force to write a code of conduct for the kind of information private equity firms should publicly disclose.
These moves are not enough. In view of their size, the range of the companies they own, the wealth they have created for their partners, the secrecy that surrounds them and the spectre of bigger and more politically sensitive deals ahead, private equity firms’ plans to lobby Congress or to make available a modest bit of information will not mollify critics and regulators. Here, then, are the additional measures they might consider.
The first priority should be to allay fears that the enormous financial leverage that private equity firms employ does not risk widespread danger to the global financial system. ….
In order to deal with this potential problem, big firms could voluntarily give detailed information on their capital structures, borrowings and debt service strategies to central banks on a confidential basis….The big private equity firms should also create an independent and fully endowed foundation to collect other types of data that could clear up many alleged misconceptions about what they do.
This includes information that addresses whether, in the interest of cost-cutting, private equity firms are squeezing employment for strictly short-term gains, neglecting environmental obligations, gutting important research and development efforts, or hollowing out once-vibrant communities. It also involves information on how private equity investments perform once they go public. The data should be audited by one of the four big accounting firms. The independent foundation plus the third-party attestation will be essential to prove the credibility of information. Such credibility will never come from industry-owned trade associations.
Third, one reason why private equity firms have attracted so much attention is the enormous wealth that their partners have accumulated. These men and women could create charitable organisations, perhaps in the names of their firm, with the scale and scope that parallels that of the private equity groups themselves.
Some of the funds might assist workers to be retrained, or invest in communities that have suffered as a result of industrial restructuring…
What is certain, however, is that without a more fulsome strategy that goes beyond what private equity firms seem to be contemplating, these companies will be hanging from an even more precarious limb…
A couple of quibbles with Garten. Rather than have the industry set up a new organization and have its data audited, it would be better to devise a framework for aggregate data in the industry, that could also be cut by, say, size of deal, size of fund, perhaps industry, perhaps geography, and have participating firms report it to an existing entity, most likely an accounting firm (the contract could rotate every 3-5 years). Even with auditing, the use of an industry-created group would be suspect.
In addition, merely having the lords of private equity engage in more charity probably won’t help enough. It would be better if some funds considered how to save jobs or create new jobs as part of their activities rather than as something they do on the side.
Companies that resisted “green” programs have often found, much to their surprise, that they often pay for themselves, or more. For example, British Petroleum set a target in 1997 to reduce its greenhouse gas emissions to 10% below its 1990 levels by 2010. It met its goal in three years, and its expenditure of $20 million produced $650 million in savings.