Private Equity firms basically are Conglomerates in drag and
should never have been allowed to slip under the regulatory mantel designed to
protect retail investors from fraudulent investment firms. As a consequence PE
promoters enjoy unfair advantages with respect to tax, corporate governance
(esp corporate compensation), transparency, treatment of staff and clients. No
wonder the universe of listed companies is shrinking fast - and will accelerate
if regulations are not changed - FAST!
In this age of growing concern about Inequality it is a slap
in the face of ordinary investors - let alone citizens - if more and more
public companies get gobbled up by financial engineers and their conspirators
among dominant shareholders and management. Apart from the problem that benefits
of the Private Equity industry are disputed - there was hardly ANY private
equity to speak of before the mid-1980s and the world was doing quite well
without it - the distributional effects are clear for all to see: Who else but
promoters of the industry can spend millions on a birthday party? why should
public companies show restraint in relation to executive compensation when
promoters and their hired guns in management don't disclose their pay packets?
They probably get paid amounts that would sometimes be multitudes of what
senior executives in public companies can earn. It is clear that mechanisms to
protect public shareholders from having their companies taken away on less than
attractive terms are not up to the task. Who cares about Wider Shareownership
or the Shareholder Democracy? Rome's decline started when wealth got
concentrated in the hands of the few.
There may well be agency problems at Public Corporations,
though family firms often are also ridden with conflict in the C-Suite,
especially between family members. But as long as Private Equity gets favorable
treatment from a tax, regulatory and transparency point of view this trend away
from listed companies will continue. The irony is that Private Equity needs the
public market in order to sell its investments. The question of how citizens
and workers can be made part of a capitalist system that is concentrated in a
very small number of hands should not be forgotten - it may be the most
important question after all!
But one aspect is forgotten (on purpose?) in this ongoing
saga. For arguments sake let us agree that it is beneficial and fair to give
entrepreneurs and investors a lower tax rate on capital gains. But the
promoters behind Private Equity are not always putting sufficient funds of their
own into the businesses they finance. Taxable income could easily be converted
into capital gains if they award themselves a sort of founder's shares at
artificially low prices - and voila, when the company/asset is sold they can
book a capital gain that is taxed at a much reduced rate. Given the opaque
nature of Private Equity one has to assume that this practice is quite
prevalent in the industry. In addition, basing buy-out vehicles in offshore tax
havens allows even more manipulation of tax levels. So while most of the money
managed by 'Private' Equity ultimately comes (via financial intermediaries)
from the Public the tax affairs of the promoters are the one aspect that is
really private. Maybe a small part of all the noise and energy spent on reforming
pay in the listed company sector would be much better addressed to shed more
light on the pay practices in the Private Equity business.
The re-emergence of Dell as a Listed Company can only leave
a sour taste in the mouth of anyone who supports a Market System that benefits
the great majority and not just a few clever financial engineers.For a long
time Pro Governance has argued that it is much to easy to take listed companies
'private' (a misnomer in the case of 'Private Equity' backed deals as PE firms
are mostly working with money from Joe Sixpack even if it is allocated by
fiduciaries in the money management food chain).
Most end investors - and even their often gullible
fiduciaries acting as 'limited' partners in the Private Equity investment vehicles
- are blissfully unaware of the myriad of fees that are charged to the funds
they are invested in. So the current spat between some Private Equity big wigs
allows a peek into this opaque world. Given that the disputed fees relate only
to the money invested by three officials of the funds one can imagine the
amount of money that was charged to the proportionally much larger amounts
coming from the 'limited' partners (ultimately Joe Sixpack). Surprisingly the
critics of executive pay in listed companies are mostly (all?) silent on the
goings-on in the 'discreet' world of (not so) 'Private' Equity where most of
the money really is invested on behalf of the general public.
Some call Private Equity and their close cousin, distressed
debt investors, nothing but locusts that are out to make a fast buck. This
judgment may be overly harsh, but given the short time between investment and
exit that is the hallmark of some deals it may be difficult to disprove this
judgment.One are of possible abuse, however, is the treatment of shareholder
loans when an investment hits the buffers. Loans from major or especially
controlling shareholders should be treated as subordinate to all other claims,
pensions, wages, trade creditors and tax authorities.In the case of Private Equity
'Funds' it should also not be possible that the Fund washes its hands of an
investment that had gone sour. The Fund should be treated as a going concern,
much like a Conglomerate. This would instill a much higher level of commitment
from the PE investors and prevent overly risky investments on the basis of
'heads we win, tails you loose
(20-June-2021)
