Socialist Worker

Private equity firms: the new vultures of capitalism

Private equity companies are making billions by cutting costs and attacking wages using tax loopholes created by Gordon Brown, writes Simon Basketter

Issue No. 2056

Sir Ronald Cohen, Philip Yea of 3i, Damon Buffini of Permira owns AA, Guy Hands of Terra Firma, Jon Moulton of Alchemy, Philippe Costeletos of TPC owns Gate Goumet. The pictures are from the GMB union display at the Glastonbury festival. Go to h

Sir Ronald Cohen, Philip Yea of 3i, Damon Buffini of Permira owns AA, Guy Hands of Terra Firma, Jon Moulton of Alchemy, Philippe Costeletos of TPC owns Gate Goumet. The pictures are from the GMB union display at the Glastonbury festival. Go to Benefit

In 2002, he reduced this to just two years. The people who benefited were private equity companies.

Over the past three years, private equity has emerged as a huge and powerful force. In 2006, the value of global private equity deals was nearly $750 billion (£380 billion) – five times the figure for 2003.

The British private equity industry is estimated to have invested more than £75 billion in businesses around the world. It has brought huge rewards for the bankers, lawyers and advisers who service it.

Of the 65 companies in the FTSE 350 that have been taken over since 2005, 27 went to private equity buyers.

Brown and the Labour Party are deeply grateful for the money from the tycoons that run these companies.

Last year for instance, William Bollinger, co-founder of Egerton Capital, gave £250,000 to the Labour Party. Jon Aisbitt, formerly a partner at Goldman Sachs, who now sits on the board of Man Group, gave £250,000.

Sir Ronald Cohen, who recently retired as head of Apax Partners and is an advisor to Brown, also gave £250,000. Nigel Doughty of another private equity group, Doughty Hanson, gave £250,000.

The consequences for workers have been disastrous.

Texas Pacific, one of the world’s largest private equity companies, was the owner of Gate Gourmet when the company sacked its workforce by megaphone.

At Bird’s Eye the closure of the Hull factory was announced a few months after a private equity takeover. Production was moved to Germany with the loss of 600 jobs.

Little Chef

When Little Chef was taken over many of its branches closed. The company’s land was sold and then leased back. When it was sold on, the new company was unable to pay the rents and it almost folded.

The AA was taken over by private equity companies in the autumn of 2004. The workforce was cut from 10,000 to 6,700. The working day was extended to 11 and a half hours and wages were cut in its call centres.

The employer boasts that productivity jumped 25 percent and profits doubled to £200 million. In February 2006, the owners borrowed £500 million to pay a special “profit” to shareholders.

Two weeks ago Brown said, “We will make sure there is justice and equity in the treatment of tax arrangements” for private equity.

As venture capitalist Nicholas Ferguson put it, executives in private equity firms pay a lower rate of tax than the people who clean their offices.

“I have not heard anyone give a clear explanation of why it is justified,” he said.


‘I’m a greedy bastard’

Jon Moulton is the head of venture capitalist Alchemy Partners. He said last week of a fellow venture capitalist resigning as chair of the British Venture Capitalist Association that he was a “thoroughly nice guy. Not hired for standing up to Socialist Worker types!”

Moulton is made of tougher stuff. He has said, “Making people redundant is not a nice thing to do to a human being, but nor is removing haemorrhoids – and sometimes that needs to be done.”

He is a “minor” supporter of the Tory party – he has donated about £50,000. He says, “I have to declare an interest.

“Fundamentally, I like really awful times as the collapse of the UK economy is ideal for me and my business.”

His profits from Alchemy are not disclosed but his estimated personal wealth is £172 million. He wrote an “abc” article to explain private equity excerpts include:

  • C is for Carried Interest

    The percentage of the profit on a transaction that goes to the partners of the venture capitalist (VC) firm.

    Known as “carry” as in “too much money to carry”.

  • E is for Envy Ratio

    The ratio between how much money a management team makes and how many workers they make unemployed.

  • G is for Greedy Bastards

    That’s management. And us.

  • J is for Jersey

    Where many VC funds are domiciled. Because they like the weather.

  • L is for Loadsa Money

  • P is for Profit and P45

    VCs seek to make one by handing out lots of the other.

  • U is for Unions

    A VC’s greatest ally. Particularly helpful in restructuring dying businesses to meet the needs of the market economy.

    We’re all capitalists now.


Brown’s moneyman and envoy

Sir Ronald Cohen, former executive chairperson of Apax Partners, Britain’s biggest venture capital company, is one of the most successful figures in the City.

Cohen is set to replace Lord Levy as Labour’s chief fundraiser when Brown becomes party leader. Cohen has given over £1.5 million to Labour.

Brown already employs Sir Ronald as a foreign policy adviser.

His Portland Trust is a foundation aimed at bringing peace to the Middle East by introducing neoliberalism.

He has been called “the father of British venture capital” – investing in dozens of firms before selling them on for multi-million pound profits.

In 1974, Cohen stood as the parliamentary candidate for the Liberal Party in Kensington North, and in 1979 he stood as its European candidate in London West.

In 1996 he switched allegiance to the Labour Party, becoming a supporter of Tony Blair.

He has homes in Notting Hill, west London, New York, and Mougins, near Cannes.

A long-standing friend and ally of Brown, Cohen was appointed by the chancellor in 2000 to chair a treasury social investment task force that encourages entrepreneurs in deprived inner city areas.

The same year Cohen was nominated for a knighthood by the treasury.

He is also a director of the International Institute of Strategic Studies – a Cold War thinktank.

Apax’s most successful investment was in the software company Autonomy. Apax sold its shares in the company in 2000 just before the dotcom crash, walking away with a profit of about £150 million on its £1.8 million investment.


The tax and fees scam

Some of Britain’s richest people have accumulated their fortunes through private equity.

Such funds can generate enormous payments for private equity partners who usually get “carried interest” – typically a 20 percent share of any profits from selling companies on.

It is this carried interest that is eligible for tax relief, which reduces their rate of tax from 40 percent to 10 percent.

The partners in private equity firms in practice only pay 5 percent tax on the “carried interest”. That’s not a tax dodge, but legal structured agreements with investors about how the rewards and costs of investments are shared out.

Brown may tighten this specific rules when he comes to office. If the tax law is changed as the business press suggests it will, it will hit just 30 people.

There are about 180 private equity partners operating in Britain. At least 150 of the 180 of them are “non-domicile” for tax purposes – so they pay ZERO tax in Britain.

The partners in private equity companies should be taxed to the hilt but taxing the actual profits of the companies should also be on the agenda. And Brown is unlikely to do that to his business backers.

Buyout

Charges associated with the private equity leveraged buyout, such as fees for completing the deal and annual management fees, are also loaded onto the acquired company’s accounts, not the private equity fund.

For example, had a private equity firm been successful in a £10 billion bid for Sainsbury’s, it is estimated the firm would have received from Sainsbury’s an immediate fee of £50 million (a 0.5 percent fee of £10 billion) simply for completing the acquisition, as well £30 million a year in management fees.

This is on top of the enormous fees the accountants and lawyers who oversee the deals make out of the process.


What are private equity firms?

A few years ago, private equity was a fringe activity that involved just a few rich people.

Now, it’s highly likely that your high street bank has lent shedloads of money to private equity and your pension fund has invested in them.

Some three million workers in Britain work for companies controlled by private equity.

Private equity buys, as cheaply as it can, a company. It borrows heavily to finance the purchase, and then uses the cashflow over, say, five years to pay off the loan, while also cutting costs ruthlessly.

Private equity does capitalism’s dirty business in the dark. A public company, quoted on the stock exchange, is a tiny bit accountable to a wide range of shareholders.

Some rules apply to how it’s run and what it discloses.

A private company has no such obligations. As with every neoliberal measure, Britain and the US are leading the way.

Up to 90 percent of the cost of acquisition is funded by debt and 10 percent by investment, which reverses the usual financial structure of firms.

If private equity targets a firm worth £10 million and thinks they can turn it into a firm worth £12 million, then that is a 20 percent return.

But if they can persuade banks to provide £9 million of the £10 million, then their return becomes 200 percent.

Private equity engages with workers on a “heads we win, tails you lose” basis. If a buyout goes well, private equity bosses receive huge returns.

The workers, if they are lucky, get to keep their jobs. If the company goes bust, the private equity company sells off the assets to pay the debts and the workers get nothing.

The scale of the operation is huge. One of the largest private equity companies Blackstone Group’s accounts came to light last week in the US as it offered itself to new investors.

Billions

Co-founder Peter Peterson stands to make $1.9 billion from the deal while chief executive Steve Schwarzman will pocket around $450 million and still retain a $7.7 billion stake.

What the current focus on private equity does is throw light on workings of our society. Other capitalist firms screw over their workers, sack people and steal their pensions.

Private equity is simply an attempt by the bosses to make as much money as possible out of the process with as little control as possible.

Private equity is not just the “unacceptable face of capitalism”, it’s what capitalism looks like in the raw. The companies’ methods bring to the fore the reality of the way this system works.


Where’s my pension?

Workers who contributed for decades to pension schemes now find themselves in poverty after private equity firms walked away from pension liabilities amounting to at least £2 billion, according to research by the GMB union.

British United Shoe Machinery (BUSM) was bought by Sir Ronald Cohen’s private equity firm Apax Partners in 1995. Bob Duncan, a member of the GMB, worked for BUSM for 36 years until its insolvency in 2000.

“I was a specialist engineer,” he says, “and worked a 38-hour week plus overtime, building shoe machines that sold all over the world. When I joined, the firm was thriving with about 6,000 workers.”

After the receiver came in, there was no money for redundancy payments. Bob reassured himself his pension, at least, was secure. But about three months later he heard that he would not be getting anywhere near it. He was expecting a core annual pension of £9,150.

He says, “I’ve clawed back just over half that now, but I’ve had to fight all the way to the European Court of Human Rights.”

At Turner & Newall, a private equity company took a controlling share of the parent company in the US and withheld funding for the British pension scheme. Following the insolvency of the British employer, the company’s assets were bought back (at a reduced price) by the same US private equity company.

The result is that the company continues as it did before private equity involvement but without the pension scheme.

The T&N pension fund’s unfunded liabilities are estimated at £875 million. The 40,000 workers received just 7p in the pound of their pension.


Little illusions

The private equity tycoons like to pretend that their business is all about helping companies and creating an entrepreneurial spirit.

The reality is that most private equity companies have nothing at all to do with business start-ups. Even when they do there should be little illusions in their worth.

In 2002, Sir Ronald Cohen was the inspiration behind Bridges Community Ventures. It had £20 million of government money matched by £20 million of private funds to “invigorate the poorest UK boroughs”.

Its most notable achievement was helping set up a price comparison website that was sold for £22 million to the company behind the Daily Mail.

It has handed over £8 million to its private sector investors from just three company sell-offs.

Then there is tycoon Sir Christopher Evans, the biotechnology millionaire, who invests in start-up companies and lent the Labour Party £1 million.

He was arrested last September by police investigating whether Labour gave out honours in exchange for loans to the party and later released without charge.


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Article information

Features
Wed 20 Jun 2007, 10:53 BST
Issue No. 2056
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