Friday, March 02, 2007

Kaletsky on Private Equity

These facts in Kaletsky's piece utterly undermine Hutton's, already weak, case against private equity:

"It is not good enough merely to quote statistics about the broadly positive effects of private equity deals on profits, productivity and even jobs — impressive though these are. The most extensive study of what happens when private equity companies take over businesses has been conducted by the Centre for Private Equity Research at Nottingham University. The research shows not only that investors in these deals over ten years on average made profits 22 per cent above the market index, even after paying the seemingly exorbitant fees of the merchant bankers and lawyers. More surprisingly it shows that employment, after dipping by an average of 5 per cent in the first year after a buyout, rose by 21 per cent after four years; also that productivity almost doubled in this period, that product innovation increased and that companies showed evidence of more entrepreneurship. Most surprisingly of all, the Nottingham study — financed in part by City institutions — “found higher levels of employment, employee empowerment, and wages” after these deals."

This article should also make Chris Dillow think again as it would appear that public limited companies are unfashionable thanks to regulation rather than any inherent inefficiency. My explanation, and one that is clearly credible to a certain extent, is that with the ability to privately pool large sums of capital, it is possible to avoid the free rider problem associated with public ownership. However, if Kaletsky's, also plausible, explanation holds then Dillow's case, based on identifying a possible inefficiency of the traditional capitalist ownership structure, is critically weakened:

"The answer is actually quite clear, but it has never been heard from either the detractors or defenders of the private equity business. The real origin of what trade unionists regard as this industry’s excess profits is not the lack of regulation of private equity. It is the overregulation of pension funds, public companies and other investment institutions.

Trade unionists and old Labour politicians will never make — nor even understand — this argument. For them, demanding extra regulation to control the likes of Damon Buffini, the head of Permira, is the automatic response."

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