Tuesday, May 02, 2006

Equitable equity?

The Guardian has an interesting piece, sadly not availible in its website, on private equity firms, which I've been interested in lately. As ever, it hints at a major problem but overstates the impact of its figures. I would contend, however, that this is more the result of sloppy journalism than the lack of an actual problem. Call it anti-corporation bias if you will, but there remains much of the private equity boom that's going unreported. Funnily enough, the private sector is unlikely to foot the bill for such research.

Some interesting statistics do arise from the article however:

80% of PE deals are backing small firms (British Venture Capital Association)
If true this is indeed encouraging. The inference is that such firms provide more employment and are characteristically more innovative than larger firms. Private equity is therefore providing funding for entrepreneurial ventures - the only ones, some would argue, that matter for economic progress. More information is needed about what sort of business these small firms are doing to see if this story matches reality.

The AA story
The Automobile Association was bought by venture capitalists Permira and CVC in 2004. Since then over one third of its 10,000 jobs have been cut and its has slipped from 1st to 3rd in the Which? rankings of roadside assistance. Operating profits have nevertheless doubled to £200m.The deal - which was named 'Deal of the Year 2005' by Acquisitions monthly - was worth £1.75bn. The amount of debt taken on to finance the deal? £1.85bn.

What seems to have happened is that investors were attracted to the AA's 1.6 miliion insurance policies and £1 bn loan portfolio but less excited by the inconvenience of roadside recovery. A victory for the market mechanism. Less so for 3,400 people who have lost their jobs.

Questions: How many of those laid off are still unemployed? Have they been absorbed by the other details? How far can we push the idea that the 'efficiency' savings will filter through the economy. Could you tell me how that £200m, taken out of the hands of workers will be magically redistributed? It seems the argument relies so much on a an untraceable chain of events as to have a hypnotic edge over the fact that 3,400 lost their jobs and a number of rich people got even richer for it. What remains is a debt saddled company, and some ex-workers who have had their lives ripped apart.

See also Debenhams story

Much more's to be said on this issue. Economic innovation is vital for the economy and finance necessary ensure it. If such finance is truly innovation inducing rather than mere restructuring to give money to those who already have enough of it, then it seems acceptable. The no pain, no gain attitude, perhaps more justified. It does not seem clear that this is the case. Judgement once more suspended.

No comments:

Related Posts with Thumbnails