When companies get sold as a whole or in part to Private Equity
operators we raise the same questions as we do in regular mergers
between normal operating companies. The main problem is the question
of obtaining the best value for all shareholders and whether the
demise of an independent company is really in the best interests of
In many cases incumbent management has
cut a side-deal with the Private Equity buyers and this creates
serious concerns about conflicts of interest. Did the managers pass
on too much information? Do they have an incentive to sell the
business below value?
It appears that the strong investment returns that the Private
Equity Industry claims to have achieved (emphasis is on claim!) is
to a large extent at the expense of public shareholders that have
been forced to sell companies or subsidiaries too cheaply (often
with the connivance of the management). As we explain in the section
on Mergers, bidders are allowed to pick off shareholders in target
companies much too easily and one somehow has to wonder why the
investment returns of the Private Equity Funds is not even higher in
view of this advantage over ordinary shareholders.
Private Equity operators benefit from extremely lenient regulation.
They are basically conglomerate business structures that should not
be able to reap the benefit from legislation that was intended to
regulate common ownership of investments by private investors. It
was never intended to exempt operating businesses from accounting,
tax and labour regulations that all companies - private or publicly
listed - have to observe.
The claim is often made that as Private Equity is by definition
'private' it should not be subject to the same regulations as
publicly listed companies. But given that nearly all the funds are
raised from the public the name 'Private' Equity is a misnomer.
While we would not go as far as calling these funds 'locusts' they
certainly put on a pretty close performance given the enormous - and
largely disguised - fees and compensation extracted from the
investments financed with public money.
Private Equity also benefits from be exempted from various corporate
governance codes (especially with respect to executive compensation)
and therefore open a convenient backdoor for the circumvention of
The business argument for Private Equity usually claims that these
Funds are necessary in order to improve business efficiency in the
companies or subsidiaries they invest in. We would argue that a
change in management would in nearly all cases be a simpler and
cheaper way of improving business performance.
In addition, a growing concentration of company ownership in a small number of
opaque management companies that are nothing but conglomerate
holding companies is also contrary to the aim of a wider spread of
company ownership that should be a focus in a democratic society.
ON PRIVATE EQUITY
About Pro Governance
Our Mission is to
campaign for the protection of investors and savers by promoting
good corporate governance.
We also believe that the wider spread of share ownership is in
itself a public good and may sometimes even be preferable to higher
Shareholders in publicly listed companies are widely dispersed and cannot
micro-manage the affairs of the companies they are invested in. The
international nature of today's shareholder registers make this also
impossible for large institutional investors.
On the other hand, abuses that have developed over the past few years make
it imperative that company managements are supervised in a more efficient
Tax incentives and institutional constraints have favoured the growth of
large institutional investors at the expense of small individual
shareholders. This makes it more important than ever that these investors
behave like fiduciaries and have the interests of their clients at heart.
This means that the business of
money management cannot be treated like any other profit-maximising business.
Like the medical, legal or academic professions the interest of the clients
has to have priority when critical decisions have to be made with regard to
companies the money managers are invested in.
We at Pro-Gov think that the establishment of an effective international forum
combining representatives from the national organisations of individual
shareholders and investors will be an effective step in the direction of
improving corporate governance.
At the moment the corporate
Governance discussion is limited to academics, journalists in the quality
business press, institutional shareholders and companies and their business
associations as well as politicians. The one party missing on the table are
the real investors who - with some exceptions - voiceless in the debate.
isn't what's illegal; it's what's legal"