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Private equity takeovers

ARGUMENTS FOR:

By buying underperforming companies, turning them round and selling on at a profit, Private Equity (PE) firms benefit the whole economy.

PE takeovers eliminate inefficiency and maximise value. By doing so they create more wealth, and not only for their own investors.

While restructuring companies may involve job losses, it saves many that would be lost if the company went under. It is inefficiency, not efficient management, that damages the economy, and leads to unemployment.

Managers of pension funds invest in PE firms, and the high rate of return on capital invested helps maintain the value of people's pensions.

Continued economic growth depends on maintaining the profitability of British business. PE investment has proved itself to be an efficient means of doing this.
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ARGUMENTS AGAINST:

PE firms are essentially asset-strippers, concerned only to secure a high and speedy return on their investment. They buy companies whose share value has been falling, strip out unprofitable elements with resulting job losses, and then refloat the company at a higher valuation.

PE firms display no social responsibility; they have no interest in investment in training or plant, since such investment is costly and rewards are deferred.

Short-termism has been the curse of British industry for half a century. PE finance, being geared to quick profits, perpetuates this failing by discouraging long-term planning.

By replacing public equity with cheap debt, the privatised companies can increase cash flow. The debt is 'subordinated' - interest is not collected by the new shareholders, but set against operating profits to show a pre-tax loss. So the company pays no tax while true profits are higher.

FIRST POSTED FEBRUARY 26, 2007