Michael Sommer wants to make it harder for financial sponsors to buy assets in Germany.
Sommer is chairman of the Confederation of German Trade Unions (DGB) in Berlin. With eight member unions that in turn represent nearly 4.5 million workers, the DGB is an influential organisation, and Sommer's voice is widely heard in German politics and business.
In a speech on May 30, ahead of the G8 Summit Germany hosted in the Baltic Sea resort of Heiligendamm in June, Sommer called on the government to impose strict rules and regulations on private equity investors. Warning of “the dangers to the economy, capital markets and employment that is emanating from private equity and hedge funds”, Sommer argued that self-regulation of the industry would not work. “We can hardly turn offenders into policemen”, he said.
What was needed instead was a catalogue of wide-ranging measures designed to rein in the risk-taking of private equity in Germany. Other countries, Sommer was confident, would soon recognise the need for such measures as well.
In an interview with PEI in June, Dierk Hirschel, chief economist at the DGB, said the confederation was not against private equity as such: “We do recognise that private equity can bring economic benefits; the point, however, is that the risks associated with it need to be reigned in.”
Hirschel said private equity's focus on short-term capital gain posed a danger to the long-term stability of supply-chains in German industries. In addition, he argued that there was no alignment of interest between private equity investors and portfolio companies, given private equity's way of using portfolio company cashflows to serve the debt used to finance acquisitions, as well as its tendency of applying too much pressure on businesses to generate returns.
Hirschel also claimed, as had Sommer in his speech, that 25 percent of all “private equity investments” ended in insolvency. He said the percentage was based on data published by the German Venture Capital Association (BVK), but admitted that it included early-stage venture capital investments and latestage private equity deals. (The BVK, in a response to Sommer published on May 30, described the DGB's use of the 25 percent figure as “deliberately misleading”, insisting that the true percentage of buyouts ending in bankruptcy is single-digit.)
As part of a catalogue of demands, the DGB wants the government to give trade unions more influence and greater participation when private equity investments are being negotiated. As an example, Hirschel pointed to the €4 billion sale of Kion, the forklift truck division of Wiesbaden-based conglomerate Linde, to KKR and Goldman Sachs Capital Partners in November 2006. IG Metall, the union acting on behalf of German metal workers, played an exemplary role in the talks leading up to the deal, he said.
The DGB also hopes that the government will impose restrictions on the use of debt in leveraged transactions, reduce interest deductibility on corporate loans, ask equity sponsors to pay more tax on capital gains, and refuse to liberalise existing restrictions preventing German institutional investors from moving more of their capital into alternative asset classes, amongst other measures.
Private equity investors active in Germany, whilst clearly not in favour of the government adopting a restrictive stance, say the prospect of cooperating closely with trade unions does not trouble them. To the contrary: “Employees and unions tend to be reasonable if they understand the need for change. If your concept is value-generating, and if you're prepared to share the results with the workforce, you will be able to find support – as long as you communicate this in the right way,” says Ralf Huep of Advent International in Frankfurt. Financial incentives also help, of course. “We have certain incentive schemes that reward the workforce as well as the managers. If profits beat expectations, then it's not unheard of for us to pay out a special bonus – it's fair enough to share the upside when things are going well.”
“By and large I think the workers' councils are a good thing for the country,” adds Thomas Krenz at Permira. “These are usually 10 or 15 year veterans of the company – they know the industry pressures, so they won't be irrational.” Of course, this does not mean the process will always be a straightforward one. “Private equity is new to most of these people, so we shouldn't expect to see a change in mindset overnight – it will take time for this dialogue to become more constructive.” So far, their impact has been limited.
The most high-profile case of union activism in Germany in recent months has been a strike this spring organised by Verdi. The services union, Germany's second largest, led industrial action at Deutsche Telekom, the former state-owned telecoms colossus struggling with inefficient structures, a dwindling customer base, a deteriorating share price and a massive public relations challenge. When the German government, still DT's largest shareholder, sold a minority stake to US buyout firm The Blackstone Group last year, the deal was meant to be a watershed for private equity in the country, as well as a test case for organised labour's relationship with buyout firms. But its ultimate impact remains to be seen.
Most observers interviewed for this article played down its implications for the buyout industry as a whole. “The Deutsche Telekom situation is not really seen as a private equity issue at all,” says Jochen König of RBS. “It's a global problem facing telecom incumbents – they were state-owned for decades, so they have cost structures that are just not competitive.” Blackstone, which is in a quiet period ahead of its forthcoming flotation in New York, declined to comment, but sources say it remains committed to a long-term involvement with the business.