Friday Letter: 11 out of 50

Exclusive research by Private Equity International, PEO’s sister magazine, shows conclusively London rivals New York as a key private equity hub. The incoming UK premier will do well to remember that.  

An equal number of the largest 50 private equity firms in the world are based in London as in New York, according to the PEI 50 an important new ranking from Private Equity International magazine.

This league table of the world’s 50 largest private equity direct investment programmes reveals that top buyout shops are equally divided between the financial centres of New York and London, with 11 headquartered in each city.

In recent years, an increasing number of hedge funds, investment banks and other financial entities have been flocking to the Big Smoke – both because of its proximity to emerging markets and as a result of onerous US regulatory requirements – and in turn challenging the Big Apple for the title of world financial centre.

That Tony Blair, the UK premier, is due imminently to announce the timing of his departure is an open secret: next Thursday, he will at last go public. By contrast, his shoo-in successor Gordon Brown, Labour’s iron Chancellor of the past decade, has kept his cards close to his chest. Nobody, apart from his closest confidants, knows quite what Brown has planned.

Some are already fretting about a Brown administration’s appetite for micro-management – a hallmark of his time as Chancellor. And as part of this, the private equity industry is wondering whether a heavier hand may about to be laid upon it.

As the PEI 50 ranking shows, London headquartered private equity firms – all with international investment mandates – have raised $134 billion (€98 billion) in the past five years, while the New York-headquartered firms have raised $161 billion in the same period.

Much of the London-based capital will find a home in the UK. It will boost UK businesses and it is estimated will generate employment for around 10,000 people and account for 7 percent of the turnover of the UK financial services industry. For a premier likely to need as many friends as possible at election time, here’s an industry that is moving the economy’s needle in a very meaningful way.

Nor is that the full picture. By its very design PEI 50, which ranked firms by the amount of capital they have raised for direct private equity investment over the past five years, ends at the point where the mid-market firms kick in. More than two thirds of all private equity investments in the UK were below £1 million in 2005. As the BVCA reminded the UK Treasury Select Committee in its submission this week, this part of the industry makes a very significant economic contribution in its own right.

As well as more formal representation, to help ensure private equity would still flourish under a Brown administration, the industry would do well to encourage the management teams it backs to make a louder case for private equity.

Just as Grant Hearn, the chief executive for Travelodge, did this week on the BBC. A Permira investment now owned by Dubai International Capital, Travelodge is a fine example of job creation under private equity ownership. It is an eloquent example of the broader benefits of buyouts. And another audible means to make an at times hard of hearing government listen.

PS: Click here for a PDF of the executive summary of the PEI 50. Complete profiles of the PEI 50 firms and an analysis of their fundraising and deal-making activity can be found in the May 2007 issue of Private Equity International.