Friday Letter: Keep it real

The private equity industry has a fight on its hands. This is plain to see from the briefest survey of headlines from media across the globe this week.  

Here’s a selection: “Private equity must be readier to explain what it does” declares The Financial Times. In Australia ABC Online, quoting Commonwealth Bank head Ralph Norris, warns: “Private equity deals may ’become quite risky’.” Or try “CBI chief defends private equity firms as a force for good” – being the gist of a speech by Richard Lambert, which was widely reported in the UK media.

You could also have picked up stories about the US Department of Justice’s investigation into club deals; the GMB union’s narrow attack on Permira and its broader swipe at the tax relief that UK private equity enjoys; or you may have preferred to hear all about Stephen Schwarzman’s 60th birthday extravaganza in New York.

No question: everyone has views about the industry and many are negative.

What has the industry done to improve its standing? In the US it has launched The Private Equity Council, a loose affiliation of buyouts groups backing a former political lobbyist that is intended to win hearts in minds in Washington. In Europe, the trade associations are unsurprisingly arguing private equity’s case vigorously, and the buyout firms are trying to engage with the union activists. And at Davos, yet another survey has been commissioned to examine the economic benefits private equity brings.

Today, the Financial Times hosted 3i chief executive Philip Yea in a head-to-head with Michael Gordon, chief investment officer at long-only asset manager Fidelity International and a fierce critic of the industry. The paper gave each around 700 words to make their case – a prime opportunity for Yea to score a few telling points in favour of the asset class.

It almost does not matter what Gordon wrote: his is another voice swelling the chorus of often ill-informed criticism. For the record, he criticised the industry for its poor average performance and its over-reliance on leverage; for its clever rebranding to entice pension fund money that otherwise might have been scared by the leveraged buyout label; for its short-term goals and finally for the potential for conflicts of interest when buyout firms approach managers of public companies.

Yea began his article by trying to steer the debate away from the “world of soundbites and oversimplification” and focuses instead on the superior model of governance that private equity enjoys in the pure alignment of shareholder and manager. He notes that the FSA, the UK regulator, believes it to be a good thing making a positive contribution to capital markets, and cites the BVCA’s statistics showing the benefits of the private equity model.

The trouble is, these statistics, however compelling, have been pointed to many times before but do not appear to cut any ice with the opposition. Perhaps it’s better to ditch the stats and go for something more inexact? So Yea evangelises: “As the number of companies touched by private equity increases, so does the body of people who are aware of these advantages [for a company to be owned by private equity].”

A couple of paragraphs later though Yea concedes that explaining the industry as a force for good is not sufficient. Instead “senior players have to step up and be seen as responsible and engaged members of the business community”.

The trouble is that senior figures from major private equity firms are unlikely to seem disinterested when it comes to arguing the case for the merits of the private equity model. What is needed is some informed, and less seemingly agenda’d comment from someone who has lived with, but is not of, the industry.

Take, then, the interview the FT had this week with Gary McGann, chief executive of private equity-owned Smurfit Kappa. McGann has an eye on his paper and card business’ imminent flotation doubtless, however his voice has the authority born of real experience.

He bluntly told the FT: “The private equity guys didn’t raid our war chests – and our covenants gave us a lot of headroom for capital investments and bolt-on acquisitions. In other words, we weren’t out of the game.”

“There is no doubt a period in private equity ownership is very educational and very helpful,” he said, “You just don’t stop doing it, once they exit. The disciplines you retain.” He also said that post flotation, Smurfit Kappa is not in a rush to chase an investment grade rating. It will still believe in leverage.

Here was a business man making a business case – something everyone can understand. More of the same would be helpful. Statistics are useful supporting evidence, but the battle for private equity’s reputation will be won in the real world of factories and people, products and services, profit and loss.

So tell me what you have really done for the economy lately. Tell me a story about building a business. And have the people, who helped you do it, help you tell it. The messenger as well as the message matters.

Enough brickbats: time for some bouquets.

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