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Private Equity Kkr The Next Enron?

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Just a hunch - I m book marking this page to see if I m right.

Every week they are in new take over talks, whether its ITV, or Normansol [cant remember] - they only just financed the FTSE biggest private take over at over £11BLN.

Now they are in take over talks to take over Infineum-paper, a UK biofuel company.

Its like the credit crunch has never happened.... I am perplexed..

KKR last released a statement that they are in good shape with $1.4 BLN in cash. Doesnt seem a lot with the size of their take overs.? Its also like they are buying up everything with "no money down". :o They did have to restructure debt twice because they could not meet payments.

So what is it - is there a credit crisis or not? They seem to be defying gravity. Are these take overs a way to keep running away from their debt? Are they betting on high inflation to wipe out debts [i.e. sharp devaluation in currencies]- is there something they know and i dont? I ll have to wait and see.

Edited by notanewmember

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I am perplexed..

I am also perplexed by private equity.

I've only one concrete experience - a small company bought in 2006 by a US private equity firm... they were a specialist and their web site claimed they already had 70% of the market. In an "interview" I was told that there were plans to triple the size of the business as a consequence of the private equity takeover. I asked about the markets they intended to diversify into - and was met with a blank stare. I pointed out that growing to three-times the current size implied acquiring 210% of the market (of a static size) - which I anticipated might be tricky... More blank stares from fairly senior managers... I actually got the impression that they'd never thought about it. There were rumours among employees that there had been strange wrangling with their share options - and that the majority shareholder had cut-and run with an improbably large pay off.

I feel confident that something is "up" with private equity - but I'm not sure what. I didn't get the chance to talk to anyone more senior.... but the atmosphere at the company changed substantially and abruptly around August/September 2007.

Edited by A.steve

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Isn't a private equity takeover a euphemism for asset stripping and employee exploitation? It's just a means by which financial wheeler-dealers can make huge bonuses for themselves that neither benefits the company nor its employees, nor in the long-run its customers who end up with very poor service due to employee exploitation and disillusionment.

I don't usually refer to articles by Polly Toynbee - in fact, normally I can't stand the woman and disagree vehemently with most of what she has to say, but on this occasion, I think she got it right.

This wild west capitalism is born of servility to the City

Polly Toynbee The Guardian, Tuesday June 5 2007.

This article appeared in the Guardian on Tuesday June 05 2007 on p35 of the Comment & debate section. It was last updated at 00:08 on January 12 2008.

The private equity sector, with its attendant risks to employees, pensioners and tax revenue, should be reined in and regulated

Private equity executives are "paying less tax than a cleaning lady". This is not some trade union malcontent talking, but Nicolas Ferguson, chairman of SVG Capital, which built Permira, Europe's biggest private equity fund. Private equity owners pay only 10%, sometimes much less. When even a chief protagonist starts to question their tax breaks, no wonder it hits the front page of the Financial Times. Until now private equity corsairs have vigorously denied they get any special treatment, but their avoidance of just about every personal and corporate tax is their greatest financial skill, accounting for much of their phenomenal wealth.

Today Gordon Brown faces the GMB union's conference in Brighton. The GMB has been running a highly effective campaign against the worst effects of galloping private acquisition of large public companies. It's a good reminder that even if unions lack muscle these days, they can still pack a mighty punch by unearthing undeniable facts and figures to challenge City and Westminster orthodoxies.

They have shown how private equity "success" often comes from asset stripping and squeezing staff numbers and wages. The Work Foundation's study of private equity takeovers backs GMB research. The formula is simple: on average a fifth of jobs are cut and workers are paid £231 a year less than in publicly owned companies, while large tax breaks fatten profits. Mega money is made by the dealmakers but often a weakened company limps back on to the market a few years later. British entrepreneurialism is diverted into short-term gambling, not into the skill of running businesses well, while venture capital for new enterprises loses out to the thrill of predatory takeover.

The GMB's report this week reveals the peril to pension funds when private equity takes over. The scandal over the Boots pension fund's 66,000 members is just one of many, when a greedy board let a private equity takeover forge ahead with no plans for safeguarding an indebted pension fund. The GMB report unearths 96 more pension funds collapsed due to private equity links, landing the taxpayer with the liability for bailing them out. To avoid topping up pension funds, private equity owners take a company into liquidation, perhaps for just 24 hours, shedding its liabilities. In theory public companies could do this too, but they don't. These 96 insolvent pension funds, affecting perhaps a million people, are now in the government's financial assistance scheme or the pensions protection fund. Their total liabilities amount to £2bn.

When the CBI, British Chambers of Commerce and Institute of Directors reckon up their "tax burdens" they never include burdens carried by ordinary taxpayers for these pension fund deficits, any more than they count up tax credits that subsidise low-paying employers or the gigantic burden on everyone else of elaborate City tax avoidance schemes, of which private equity may be the most costly.

The GMB calls for a windfall tax on private equity to compensate for tax and pension fund losses. The GMB lawyer Maria Ludkin reckons real losses to the revenue are far higher: "They claim to bring in money, but without transparency we can't see what they pay into the exchequer. Many are offshore investors paying nothing." So when the Adam Smith Institute issues its annual bleat about "tax freedom day" falling on June 1 this year - the theoretical moment when citizens stop working for the state and start working for themselves - they never say how much earlier that day comes for top City tax avoiders than for those on average pay. Nor do they remind us that "tax freedom day" in Thatcher's 1982 came on June 15.

The Commons Treasury select committee is to take evidence on private equity, reporting at the end of the month, just before the economic secretary, Ed Balls, produces his review of private equity taxes. Current tax breaks let private investors charge the interest from huge borrowings against profits. On capital gains they are not charged the usual 40% that applies to everyone else, but after owning the company for just two years their rate is cut to 10%. The two-year rule introduced in 2004, designed to help new ventures, puts ordinary public companies at a disadvantage , having to wait 10 years to pay so little.

Because private equity owners can pay themselves and their top executives whatever they like, without shareholders or remuneration boards to worry about, they push pay to levels where public companies can no longer compete. Yesterday's figures showed FTSE 100 finance directors had a 22% pay rise last year. The forecast is for more public companies to be taken over. Few like Sainsbury's resist private equity's freedom from the irritations of regulation, public accounts and accountable boards.

It is curious to hear union leaders talking sentimentally of the good of the public company. A GMB leader I spoke to yesterday talked of the "underlying decency and dignity in most public companies". The word "capitalism" now has no meaning because there is nothing else; what matters is how nations regulate it. Labour has let Britain drift closer to the wild west out of fear and unfamiliarity - few ministers are familiar enough with the City to treat it with healthy disrespect. Labour has been intimidated by the likes of Jon Moulton of the aptly named Alchemy Partners, who warns Brown off touching their tax privileges: "The UK has only one decent industry and it's called financial services. If we mess around with that, we'll be at the IMF asking for loans for food."

However, the IMF sees private equity as the danger. It warns that financial stability is threatened by deals that create over-indebted companies which borrow too much from banks taking high, unsecured risks. The FSA says a major collapse of a private equity firm is "inevitable". But when the bubble bursts, most deal-makers will have taken their "life-changing" winnings. One irony is that pension fund managers are being urged to invest more in pension-fund-destroying private equity, as fund managers are judged only by short-term gains, inflating demand for private equity takeovers. Never mind the hard-won laws devoted to making public companies socially responsible: private equity is a return to primitive, unregulated capitalism.

Brown will probably be politely treated by the GMB today, but he will be asked why, as in most other countries, private equity cannot be made more accountable, why it shouldn't post bonds to protect pensions and, above all, pay taxes like everyone else?

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I am also perplexed by private equity.

I've only one concrete experience - a small company bought in 2006 by a US private equity firm... they were a specialist and their web site claimed they already had 70% of the market. In an "interview" I was told that there were plans to triple the size of the business as a consequence of the private equity takeover. I asked about the markets they intended to diversify into - and was met with a blank stare. I pointed out that growing to three-times the current size implied acquiring 210% of the market (of a static size) - which I anticipated might be tricky... More blank stares from fairly senior managers... I actually got the impression that they'd never thought about it. There were rumours among employees that there had been strange wrangling with their share options - and that the majority shareholder had cut-and run with an improbably large pay off.

I feel confident that something is "up" with private equity - but I'm not sure what. I didn't get the chance to talk to anyone more senior.... but the atmosphere at the company changed substantially and abruptly around August/September 2007.

As far as I can tell, the large, non-specalist private equity takeovers are essentially asset stripping or just plain fraud. You put up a small sum of money, borrow a lot more, buy the company and somehow a perfectly sound company has a vast debt that must be serviced, instead of shareholders who might get a dividend (but the dividend can be reduced or cancelled). As part of the deal you grab as 'payment' a significant percentage of the whole deal, which gets added to the debt of the company.

This is sold to politicians and the general public as a way of bringing wonderfully expert management in to turn around underperforming companies. As far as I know, there is absolutely no evidence that this is actually the case, and the reverse may well be true; the extra debt acts to prevent investment in improvements, and cost cutting is implemented to service the debts.

Of course, those people involved in the deal - major shareholders and PE bosses - have already been paid quite fantastic sums of money, so it's worked out well for them. Even if the company eventually has to defaulkt on its debts and go bankrupt, causing losses for the bankers and unemployment for the workers, they'll have made a fortune.

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