Power really has been transferred to the people

July 2007

Much has been said of late about private equity’s attempts to acquire household names. Chemist chain Alliance Boots is to be bought by Kohlberg Kravis Roberts, while the latest assault on the FTSE 100 index sees Terra Firma ready to snap up music publisher EMI.

A lot of press commentary has been negative, but is the criticism justified? Or should the balance of opinion come down in favour of the liberation and empowerment private equity brings to companies it backs?

For my part, I cannot speak highly enough of the industry. Not only does Directorbank work regularly with the full range, from large buyout houses to growth capital houses, but last year we completed our own secondary buyout with the backing of Nova Capital Management.

The psychology of bringing a business back into the hands of the team leading it should not be underestimated. With ownership comes a greater sense of responsibility to grow a business, not only for personal gain but for all stake holders – especially employees.

Everyone sitting around our boardroom table is pulling in the same direction. Private equity has empowered the management, uniting us and enabling effective decision-making. Reducing timescales to bite-size chunks facilitates planning, encourages pace and sets common goals for stakeholders.

Growth in funds being raised by private equity houses is indicative of the success the industry has had in creating value. However, the public’s understanding has been marred by the industry’s tendency to report and promote the wrong information.

Rates of return mean little to most employees, but investment in technology, developments in emerging markets and rising employee numbers interest them and the wider public. The industry has simply not been sufficiently focused on reporting these achievements.

It is inevitable there will be louder cries for increased reporting and transparency of information, as the businesses under private equity ownership get larger. Nonetheless, the industry has much to be proud of and must step up to the plate to communicate its key messages more effectively.

By comparison, companies quoted on public markets have struggled for years with the level of regulation and the extent to which their operations have been hampered by the need to report in a way dictated by investors and the Government.

Perhaps a lighter regulatory burden would free up their ability to move swiftly, react to changing market conditions and optimise opportunities, in the way that private-equity backed businesses, unhindered by such concerns, can do.