Morrisons - Barbarians at the Gate (The Sequel)

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)

 

Climate Data in Company Accounts?

From my days as a part-time journalist during my years at University I remember one thing very well: The way you formulate the headline already implies a value judgement. So it is in this article. Asking for the sense in excluding Climate Change Data lets the reader automatically register some - however small - reaction in favor of not excluding this 'Data'. And I put it into inverted comma as data (in relation to how company accounts are affected by Climate Change) implies a false sense of precision.

Excluding the question if - and if so by how much - climate change is affected by human activity (or excessive breeding) - any effort to incorporate the data into company accounts in a meaningful way is fraught with huge problems.

Minor influences that progress literally at glacial speed (to use a pun) are hardly worth the bother. All the data collection will only provide (well-paid) jobs for a myriad of new-styled 'Climate Change Analysts' and assorted experts (such as the author of the article).

But what about major changes? Should any company report on the likely impact of sea levels rising by 3 metres or more? Or a rise in temperatures in certain region above the 40 or 45 degree mark? Making accurate predictions depend on the accuracy or inaccuracy of predictions about future changes in the Climate.

Company accounts are already a tender construct that is being abused all too often and this further complication would just make them even more liable to be distorted. Anyone with a brain should be able to form a judgement as to the risks inherent in an economic activity.
(12-June-2021)

Where's the sense in excluding climate change data from a company's accounts? (FN London, PayWall)