Does Politics have to get involved in Governance?

We have repeatedly pointed out the double conflict of interest that restrains institutional fund managers from taking a more active role in reigning in abuses in listed companies. The Institutions are themselves often the beneficiaries of lax oversight (in case they work for listed fund management companies) and also have to tread carefully in order not to be cut off from profitable business by the managements of companies they do - or try to do - business with. Real progress in corporate governance will only be possible if the ultimate share owners - the public - is effectively organised and represented. The longer the representatives of the fund management industry drag their feet over this issue, the more likely will it be that politicians will have to be involved.

UK: Savings no answer to foreign takeovers

There is a lot of hand-wringing in the UK about what to do to stem the complete sell-out of British Industry. In a week when the state-owned Deutsche Bahn was allowed to take over Arriva this subject has a special relevance. Apart from the absurd situation that a posse of 'Sovereign Wealth Funds' and nationalised industries are already controlling a substantial part of British Industry, the lack of leadership among the political circles can only astound. The main rule maker in matters concerning takeovers, the innocently named 'Takeover Panel', is basically a club that is dominated by the interests of the Merger and Acquisitions Industry. Their representatives round-trip regularly between lucrative jobs in the M+A business and even more lucrative jobs in the same industry after they served two years making sure that the M+A bandwagon runs smoothly and the flood of related 'advisory' fees does not dry up and thus threaten their Christmas bonuses. We have repeatedly pointed out that the rules of the M+A game are stacked against the long-term investor (in both the buying and selling shareholder camp given the fact that more mergers destroy value than create 'value', even in the light of the fact that the - usually negative - ''value' loaded on employees and the taxpayers is usually excluded from any evaluation of mergers). Last not least the fact that even representatives of established institutional investment firms publicly proclaim on business TV that they make the real money only when a company gets 'taken out' (sic) speaks volumes about the culture - or lack thereof - that predominates among the fiduciaries that are responsible for the investments of the ordinary citizen. We do not even want to mention the attitudes inside the 'hedge' fund community where the word greed is the only fit description for their management culture.

Time to restrict 'Private' Equity?

Once every so often the Wall Street Journal gives space to a voice that does not toe the party line. So it was refreshing to read an article that chimes with our view on the Private Equity business. We always argue that the name Private Equity is first of all a misnomer, it is not 'private' at all as most money comes from the public, mostly through fiduciaries like pension fund managers. The performance and fee structure is highly non-transparent (at least to those who are the real investors and risk takers), maybe that is the reason why the business calls itself 'private'. The PE model also allows compensation for the chosen few at the top of the pyramid to be hidden from scrutiny. There is no justification for this as the investor pool is roughly the same as in public equity. Taking control of whole businesses is also not the idea behind mutual investing on a fiduciary basis. This type of activity can be perfectly executed in the form of an ordinary company - private or listed - and the business should be taxed and regulated on the same basis. Only the lack of organisation on the part of public shareholders, investors and pensioners has allowed the development of the excesses that plague the private equity model. The economy ticked along perfectly well before the advent of the 'Barbarians' and will continue to do so long after this abuse has been checked. It is high time that the fiduciaries which channel easy pickings to the few at the expense of the many take their responsibilities seriously.

False assumptions behind Defined-Contribution Pensions

While the traditional employment-related pension (for ordinary mortals except molly-coddled public sector employees) is on the way to extinction, the solution dreamt up by the retirement industry (with the connivance of politicians) offers a very poor substitute. To expect people to successfully manage their retirement nest-eggs in the shark-infested waters of the global investment markets would be the same as expecting someone to perform brain surgery on himself. A lot of investment activity is structured on the premise of a zero-sum game where someone's winnings are dependent on the fact that someone else is losing. Most active investment management - and certainly the whole universe of derivative dealing and alternative asset management - is nothing else but a redistribution of wealth. In addition, the running of the casino is extremely costly and puts a serious drain on investment returns.