Friday Letter In the dock again

The past week or so has shown that the days of labour unions and politicians painting private equity firms as evil asset strippers haven’t passed – and threaten to undo much of the industry’s good work over the past few years in improving its public image.  

 “These kings of private equity meet in secret. More is known about the Mafia than about the antics of private equity. It is time to shine a very bright light on their activities. This is a financial exploitation process that does not care if it exploits elderly people in care, motorists by the side of the road or customers and tied tenants in pubs. What further ravages are they planning for the British economy and British jobs?”

This is not a labour union official’s statement from 2007, when the private equity industry was under constant attack from unions and eventually hauled before the Treasury Select Committee to better explain its business model and its impact on UK businesses. It’s a statement made earlier this week by Paul Kenny, general secretary of the UK labour union GMB.

Kenny spoke after the recent allegations that The Blackstone Group’s prior ownership of Southern Cross had set the care home operator on a path towards financial ruin. The GMB, along with other commentators, alleged Blackstone’s implementation of a sale-and-leaseback policy at the group’s care home properties turned a healthy profit for the buyout firm, but left the company itself struggling to repay high debts and meet a punishing rental bill. Blackstone has firmly refuted the allegations in a detailed statement, which also chronicles ways in which the private equity firm strengthened the company before and after its 2007 public listing.

It may seem odd that four years after exiting the investment Blackstone finds itself embroiled in such a bruising public relations battle. But then again, how long a private equity firm has (or has not) owned an asset has not stopped labour unions from taking aim at the industry when it suits. Recall the Carlyle Group’s 2007 purchase of US care home operator Manor Care – it was being picketed  relentlessly by labour unions accusing the firm of poor stewardship and not “putting patients before profits” before the deal had even closed.

Still, it had seemed – until the recent Southern Cross fallout at least – that the era of unions attacking private equity had largely passed. The industry has in the past four years worked hard on both sides of the Atlantic to better explain to both the public and politicians its practices and importance to the global economy. At PEI’s and the UN PRI’s Responsible Investment Forum in New York last week, for example, Kohlberg Kravis Roberts co-founder George Roberts noted the firm’s recent investor day for the first time included a panel with a union representative. It showed, he said, how private equity firms, unions and other stakeholders were increasingly working together to ensure the best outcome for portfolio companies and their workers.

Karsten Langer, recently-appointed chairman of the European Private Equity and Venture Capital Association, also noted last week that private equity has been making good progress in combating its image problems. “Our optimism is based on the results we achieved during the crisis,” he said at an EVCA event in Brussels. He cited a better-than-average default rate for private equity and venture capital-backed businesses running at below 2 percent, and a total of 16,000 European businesses having received funding from the industry since the onset of the crisis.

“Private equity has proven its ability to support portfolio companies even in severe downturns, and has shown itself to be a better custodian of businesses than other types of owner,” Langer said. “These facts are an enormous counterweight to what the sceptics are saying.”

But the PR nightmare Blackstone finds itself in is a reminder that it might not take much to undo the last four years’ hard work. The worrying message is this: private equity could successfully build 30 thriving healthcare businesses, yet if one gets into trouble, parts of the media cry foul and politicians promptly clamour for reform. UK Business Secretary Vince Cable this week ordered an investigation into private equity ownership of companies supplying public services, branding Southern Cross a “shocking state of affairs”.

For the industry, the road to bad press is still a short one. Private equity needs to show as much vigour in defending and promoting its work as others demonstrate in attacking it. In the current economic climate, it has a great opportunity to do so: a widely-acknowledged need for investment, demand for improved corporate governance and managerial rigour, and the need to preserve jobs and foster growth are all private equity tenets the public should appreciate.

And as we argued last week, not just GPs but also investors need to speak up on private equity’s behalf. The industry must seize the initiative – otherwise it risks allowing detractors to once more frame public opinion.