The private equity industry must band together to confront its image problem – and should it fail to do so, it
That was the message Vincenzo Morelli, chairman of the large buyout platform for the European Venture Capital Association, delivered to delegates Wednesday at PEI’s eighth annual CFOs and COOs Forum in London.
“Notwithstanding plenty of factual evidence to the contrary, our model is perceived to always use dangerous amounts of debt”, said Morelli, who is also an operating partner at TPG Capital. He warned that managers are seen in the public-eye as “short-term profiteers” sometimes portrayed as “con artists” that dupe large institutional investors to put their money in private equity funds that yield inferior returns.
Morelli went on to defend the private equity model by questioning some claims against the industry – how successful exits would be made impossible if the industry asset-stripped and weakened its portfolio companies, for example – and further cited a number of academic studies which provide evidence the industry has been able to produce alpha, even amid economic downturns.
After reviewing the industry’s importance to the global economy, Morelli described three primary reasons private equity managers suffer from a poor image. Firstly, “Hollywood has always painted the industry with an unkind brush,” he said, adding film characters such as corporate raiders Gordon Gekko and Lawrence Garfield, played respectively by Michael Douglas in the 1987 film Wall Street, and Danny Devito in the 1991 film Other People’s Money, depict private equity investors as “reckless”.
Secondly, European elected officials “nostalgically yearn for local control”, argued Morelli. He described a European society which never perceived the business elite class favourably, but nonetheless was comforted by these corporate bosses and their shareholders being part of the local population, subject to domestic norms and social pressure.
“A faceless private equity firm based in London who owns a business in Germany produces the fear of the unknown,” Morelli explained, adding the fear was fundamental to our nature, but an unfair criticism of the business model.
Hollywood has always painted the industry with an unkind brush.
“The good news is there are very few managers doing these things; the bad news is it only takes a couple to tarnish the entire industry’s image.”
Morelli was most emphatic on stage when voicing a number of cures for the industry’s image problem. He called for “a multiyear pan-European” revamp of private equity’s image: Meeting with politicians to explain real case-studies, issuing trade association briefing papers to inform the public, increased letter writing campaigns, collaboration with academic studies researching the industry and, perhaps most importantly, involving limited partners in the dialogue as “they are our natural supporters, and may speak to politicians with greater ease”.
Failure to take action, Morelli warned, may put “the industry’s implied license to operate” in jeopardy. He called for a unified front, urging the audience to “light the fuse together”.