Way back towards the end of the last millennium, a best-seller was published entitled Barbarians at the Gate about the excesses of financial operators who specialized in leveraged buyouts.
This practice involved skilled maneuvering whereby corporations that were regarded as underpriced by the markets were bought largely with borrowed funds, lots of redundancies were declared, many of the physical assets were sold and, if all went well from the point of view of the "barbarians," eventually the object of the buyout was also sold, at a vast profit to the financial operators themselves. It helped, of course, if it was a bull market.
In one of those great exercises in euphemistic revival, the phenomenon has resurfaced under the heading "private equity."
For some years now the barbarians have been back at the gate, contriving leveraged buyouts all over the place. But it was only very recently that the trade unions and critics latched on to this.
For example, there have been many news items about private equity deals in recent years that have been covered in routine fashion, with little hostile comment. Indeed, the very phrase private equity appeared for a time to denote the utmost in financial respectability.
But euphemistic revival can be a short lived process -- as short- lived as the tenure of ownership of the barbarians when they surge through the gates of previously impregnable public corporations.
When the Windscale nuclear plant in northwest England was renamed Sellafield, this won it a new lease of respectability in the media, but not for long. When British Leyland became Rover this was definitely a move up the euphemistic market, but not indefinitely. As for private equity, it is a description that does not sound as high class as it did even six months ago -- indeed for many it has become a dirty word, or should that be two dirty words.
There has been a lot of flak aimed at private equity groups of late -- and not just from trade union leaders. At which point, as something of an economic historian, I must declare an interest.
There is nothing wrong with the concept of private equity as such. Indeed, where would we -- or capitalism, if you like -- be without it? Entrepreneurs, and people backing them with their own money, have been at the forefront of economic growth for several hundred years. The invention of the public limited liability company in the 19th century made all sorts of industrial and economic progress possible.
But one area where the private equity groups have run into trouble is the secrecy -- sorry, lack of transparency -- that surrounds so much of their business. The famous mixed economy, or the great compromise between capitalism and socialism, involves the release of a great deal of information from public companies. Indeed, it demands a degree of public scrutiny that is not incumbent on private equity companies.
If we look back to the capitalism of the past 50 years we find a literature, dominated by the great JK Galbraith, which examines the power of the corporation. Then comes a reaction: the industrial raiders who shake up the established corporations so that analysts and financial commentators are able to say: "Hey presto: the top 10 corporations of 10 or 20 years ago have been replaced by completely different organizations."
This is all part of the creative destruction lauded by the great economist Joseph Schumpeter. But the big worry about private equity is very basic: Most people in my experience accept that, with what are known as startup companies, private equity can contribute much to the common wealth. Unfortunately, the overwhelming impression is that, when the barbarians arrive at the gate of well-established corporations, they may well be capable of shaking up entrepreneurial operations that have become institutionalized. But, more often than not, they cause great disruption, with dubious benefits for the wider public, let alone for the corporations they briefly take over.
In response to the widespread charge that they have something to hide, private equity groups have come out of their corner with fists flying. Fresh from the, perhaps unfortunately entitled, "Super Return" annual conference of the private equity world in Frankfurt, Stephen Schwarzman, co-founder of the mighty Blackstone Group, was quoted in the press last Wednesday as complaining "there are people out there that are trying to interfere with what is going on in the [private equity] business."
Well, well, well. I love it. If there is one thing that is at the heart of the private equity business, it is the desire, nay compulsion, to interfere with what is going on in other people's business.
The debate will run and run. It is a good thing that, at last, it is out in the open. And for those who wonder what British Prime Minister Tony Blair plans to do in the next phase of his remarkable public life, there may be a clue in his impassioned defense last Wednesday of the private equity business. The odds are strengthening that Blair will want to join Blackstone -- or as his predecessor John Major did -- the Carlyle Group. It is the ultimate dream of Labour prime ministers: private equity -- for themselves.
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