The Organisation for Economic Co-operation and Development, an influential non-governmental lobbying body, has rejected calls for separate legislation to regulate alternative investors.
In a report entitled “The Role of Private Pools of Capital in Corporate Governance”, the OECD concluded: “It was agreed that, from a corporate governance perspective, there was no need to promote a special set of principles for private equity firms and ‘activist’ hedge funds.”
The OECD report, which was based on a study of public to private transactions, was attempting to assess the macroeconomic effects of private equity and hedge fund ownership, and the consequences for corporate governance.
Given the active role taken by buyout firms in their investments, the report argued that such investment strategies could actually help strengthen corporate governance, by making management more accountable to shareholder value.
The report looked at concerns that private equity investment could lead to a short term approach to corporate governance. However, it said, empirical research has shown “active investors looking at long-run prospects are key to market performance, even if the same investors will only invest in the company for a limited period”. The report also noted buyout firms often indirectly strengthened the governance of companies that resisted bids.
The OECD found no evidence that activist investors were detrimental to employment, but said that given the sensitivity of the issue, it would continue its research.
It also noted a study of 199 US buyout investments, which found: “a statistically significant alpha (excess return) in comparison with equally risky levered investments in the S&P 500.” But, it added, other studies have found: “that an average return net of fees to be roughly equal to holding the S&P 500 – but there is a wide and persistent difference between private equity funds.” The report said this may indicate “the room for such funds is limited, so that it is a far from being a universal (investment) model.”
The report found that: “private equity is a risky business with a number of transactions involving companies already in difficulties yielding low returns, offset by some highly profitable investments.” One study showed that across buyout investments, the mean rate of return to equity was 70.5 percent, but the median was -17.8 percent.
The OECD’s findings are similar to those of European Central Bank in April, which concluded that increased regulation of the private equity industry was not necessary – although it expressed concerns about the amount of leverage used in deals. In the same month, the IMF published a report to the contrary, arguing that leveraged buyouts are one of the greatest threats to economic stability.
The full report will be available at the end of June. The OECD has made available a summary and its key findings here.