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Private Equity: Have Investors Learned From Their Mistakes?

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It seems a long time ago when private equity was the unacceptable face of capitalism in Britain. But on the eve of the banking crisis, in June 2007, prominent British representatives of the industry were hauled before parliament's Treasury select committee to explain themselves as political and public disquiet over the sector reached a peak.

"You are effectively filling your boots with debt," said Brooks Newmark, a committee member. The then chair of the committee, John McFall, excoriated witnesses – including executives at Permira, 3i and Carlyle Group – for failing to clean up their public image. "Here is an industry which you tell us is so successful, but there is opprobrium out there. I think you have to do something about it."


Then everything changed. As the credit crunch hit, the bank loans that fuelled the buyout boom dried up and many firms' prized acquisitions were burdened by debts they could not pay.


Tim Hames, chief executive of the British Private Equity & Venture Capital Association (BVCA), said the buyout boom should be seen as a blip instead of something the industry wants to repeat. "There was an overwhelming sense that scores of FTSE 100 firms were going to go private but it turned out Boots was the only one. It was a period of crack-house capitalism compared with which almost anything is going to look more modest. But if you take 2006-07 off the graph what we have got is a much more natural continuum."

Private equity firms raise money from pension funds and other investors to buy companies, typically with heavily debt-funded bids, and sell them on after a few years at a profit. The industry says it provides expertise, international contacts and management discipline that can transform a company. A typical investment period of three to five years gives management the time to revolutionise a stuffy private business or a public company away from the sometimes debilitating glare of quarterly reporting.


As financial markets returned to health, activity picked up, with acquisition values hitting £17bn in 2010. However, about half these deals were so-called pass-the-parcel transactions as private equity firms sold their debt-laden acquisitions to stronger buyout firms.


Tim Syder, deputy managing partner at Electra Partners, said: "Banks providing acquisition debt have drawn in their horns and what debt there is out there is more expensive – banks' margins have more than doubled. In this market, private equity firms have got to be cleverer. The days of simplistic financial engineering – buying a company, loading it up with debt and believing that it will grow in value – have long gone."

It only grew in "value" because some other idiot with even more debt came along and bought the company. Private Equity had clearly become a mass Ponzi scheme which was only generating ever greater profits because of the game of pass the debt which kept on expanding. No real value was being offered and loading up a company with debt is not creating a business that is going to have a stable long term future.

Private Equity grew out of people who did create value by restructuring poor performing companies but to create even bigger profits people realised that pass the debt was far more profitable providing you weren't the last one holding the debt as with the case of Guy Hands and EMI were the debt loan became unsustainable.

Sorting Through the Aftermath of Private Equity Deals

Excesses of private equity put mattress firm on death bed

Profits for Buyout Firms as Company Debt Soared

Firms Profited as Simmons’s Debt Soared

Private equity had discovered flipping. There was no business innovation just leverage.

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  • 406 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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