July 2021


Pro Governance

Promoting Good Corporate Governance









Bondholder Protection


Merger Regulation


Private Equity

Shareholder Activism

Shareholder Voting

Wider Share Ownership






Private Equity

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 all constituents.

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 these codes.

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.




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 economic efficiency.

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 way.

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.

"The scandal isn't what's illegal; it's what's legal"
(Michael Kinsley)






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