It has been suggested that CVC Capital Partners’ failed bid for J Sainsbury earlier this month was in part caused by CVC’s fear of adverse publicity following the public relations campaign against the private equity industry led by trade union Amicus.
What is more interesting than the truth or falsity of this suggestion is the fact that the media considered it worthy of comment as a factor in CVC’s withdrawal.
Certainly the Transport and General Workers Union, which was representing most of the Sainsbury’s employees, welcomed the collapse of the bidding consortium. In the face of union campaigning, is the private equity industry already on the defensive?
Seasoned observers of the industry might reflect that private equity has become a substantial and permanent part of the UK’s economic landscape, despite the emergence of new ‘threats’ to the industry at each stage of its development. Every year reports circulate on the latest problem likely to mark the downfall of private equity. This has included the potential dangers of overleveraged investments, the financial impact of changes to pensions legislation, market saturation and recurrent concerns over lack of transparency.
Nevertheless, the industry has continued to flourish and such problems have for the most part proved to be transitory. However, trade unions are exploiting concerns about transparency for their own interests and it is the one issue that recurs – so will it prove to be private equity’s Achilles heel?
The private equity industry is, by its very nature, private. But it is now facing the unintended public consequences of a large number of private decisions. As the size of private equity funds increases and private equity investments assume an ever-more important role in national economies, the issue of political accountability cannot be ignored.
This is mirrored by the fact that governments are giving increasing attention to the economic role played by private equity transactions. In the UK Amicus’s critique sparked a reaction in which endorsement of the industry was given by New Labour, including Tony Blair, Gordon Brown, Ed Balls and Hazel Blears. However, although Balls, the Economic Secretary to the Treasury, ruled out changes to the current rules relating to the tax deductible status of interest, he did express concerns over transparency.
It is easy to accuse the trade unions of opportunism in their criticisms and of using the issues of transparency and supposed under-regulation to promote the interests of their members.
It is significant that the Government’s support of the industry was prompted by criticisms of the nature of private equity investment, rather than by any positive arguments raised by private equity funds themselves. Operating trans-nationally and being used to competition between each other, the idea of collective collaboration is not one that comes naturally to the major private equity players.
Perhaps it is time for private equity to find a global voice. Failure to do so engenders the risk that large private equity transactions will be targeted one at a time within individual jurisdictions, where special interest groups such as trade unions may mobilise both governments and shareholders to reject approaches by private equity investors for large public companies.
The logic of collective action is currently being applied by trade union lobbyists to their own activities, and opposition to the private equity industry from the trade union movement is spreading globally.
Andrew Lent, head of economic and social affairs at the Trades Union Congress (TUC), recently participated in a meeting of international union leaders at a shadow meeting at the Organisation for Economic Co-operation and Development (OECD). His aim was to mobilise the debate on the effects of private equity investment on employment and to encourage the establishment of a taskforce to consider the increased regulation of private equity as a whole.
This intervention of the unions and the questions being asked are not restricted to national issues, but form part of an international coordination and response to global investment issues.
The private equity industry needs to do more than follow suit. The British Venture Capital Association (BVCA) has made a timely intervention into the debate by announcing the formation of a working party to devise a code of conduct for the industry. However, by the time it has reached its conclusions and implemented a voluntary code of conduct, how far behind the international critique will the industry become?
Private equity is a global industry with global players – individual transactions may be governed by the legal framework of particular jurisdictions, but that is no reason to divide the industry along national lines. A degree of coordination by the whole industry may not be easy, but it may prove to be in the best interests of all concerned to avoid the situation where, in the face of criticism, private equity is permanently in a defensive ‘catch-up’ mode.
•Kathryn Brown is a partner at Paul Hastings Janofsky & Walker