Mon, Mar 19, 2007 page10

• Debate heats up over equity firms

  • AFP
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  Private equity firms, particularly those that buy up ailing businesses, strip them down and then sell them again, have begun fighting back against critics who denounce them as a serious and growing threat to companies and jobs.

  "Private equity barbarians are bigger and bolder, but not bad," was the headline in the latest issue of Global Economics Weekly, published by investment bank Goldman Sachs.

  It said that the threat of regulation seems to have been the catalyst for a belated response from the industry to increasingly harsh criticism from unions, governments and the media.

  That criticism came to a head on Friday when unions from across the world met in Paris to call for a clampdown on "cold-blooded" investment funds.

  "Union concern has mounted at the employment impact of buy-outs by what are often shadowy investors using borrowed money," the unions said in a statement.

  Damon Silvers, of the American Federation of Labor and Congress of Industrial Organizations, said at the meeting that such investors "cut jobs and stop investment in the productive capacity of the company and that has long-term negative consequences for the people."

  Calls for tougher regulation of such funds, a trillion-dollar industry that has grown rapidly in recent years, have mounted.

  The value of corporate acquisitions by investment funds hit a record global total of nearly US$600 billion last year, over half of which were chalked up in the US, up a hefty 70 percent from US$350 billion in 2005.

  But Global Economics Weekly argued that "more effecient firms ultimately create more jobs in the longer term -- even if they are likely to cause some redundancies in the short term -- and leveraged buyouts [LBOs] of struggling firms may prevent many more jobs from being lost."

  An LBO occurs when when a financial entity gains control of a majority of a company's equity by using borrowed money or debt.

  A source who declined to be named at a big buyout fund in London said that "a fragmented structure of shareholders, some risk averse, through the stock market, is not necessarily the best for the reorganization [of a company] that's needed."

  The bigger private equity firms like KKR and Blackstone often invest in listed companies and take them private.

  Bernard Attali, the head of US investment fund Texas Pacific Group's operations in France, also insists that being owned by a private equity firm can be better for a company than being listed.

  "It is often better for the head of a company ... who wants to give himself the means to develop the business, to work with professional shareholders, who are few in number and stable over a few years, and who enable him to carry out his business plan free from the short-termist pressure of the stock exchange," he told Le Figaro newspaper last Wednesday.

  Global Economics Weekly lamented that several European countries were considering regulation to discourage LBOs.

  French Interior Minister and presidential candidate Nicolas Sarkozy, who is leading the polls, said last month that if elected, he would seek a European tax on "speculative movements" by entities such as investment funds.

  "Who can tolerate a hedge fund buying a company with debts, firing 25 percent of staff and then reimbursing them by selling it in pieces? Not me," Sarkozy said in an interview.
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