Richard Lambert, director-general of the Confederation of British Industry, has weighed in to the debate about transparency in the private equity industry.
Lambert, a former financial journalist, made his point in response to recent criticism of the industry from trade unions, media commentators and Labour Party politicians.
In a speech in London today, Lambert offered strong support for the industry’s economic model, suggesting that its effect on corporate ownership in the UK had been “almost entirely beneficial”. “Private equity offers a compelling economic model, with real potential to raise the efficiency of businesses both in terms of their operations and their financial structures,” he said.
As evidence for this, he highlighted the industry’s success in aligning the interests of managers and shareholders, in returning companies to the public markets in an improved state, and in the creation of new jobs. The private equity industry epitomised Austrian economist Joseph Schumpeter’s notion of capitalism as “creative destruction”, Lambert said.
However, Lambert voiced two concerns. The first, in line with a recent consultation paper published by the FSA, highlighted the danger of firms losing track of who owns their debt. “Who will be left holding the baby if the trouble comes?” Lambert asked.
He also suggests buyout firms can do more to make their case to the wider public.
Since private equity investors are actually extremely well informed about their investments, “the issue of transparency and disclosure is more a matter of perception than of reality… But perceptions matter,” he stressed.
Private equity firms who have previously preferred to operate “well below the radar screen of public interest” have now reached a size where that approach has to change, he said.
“They should be leading the discussion about appropriate disclosure structures, and they should be doing more to develop common standards of reporting – for example, about their investment returns. They shouldn’t be leaving it to others to explain their real value to business, and to the economy more generally. They should be playing a more visible and active role in promoting corporate social responsibility.”