Editors' Blog

Only read this blog if you’re really into private equity…

Posted 25/01/2008 by Alex Novarese

Sometimes it’s nice to jump outside the legal goldfish bowl. One such occasion occurred recently when I was asked to speak at a conference on Sir David Walker’s disclosure code for private equity, which provided a fascinating insight into one of the most dynamic and controversial forces in modern capitalism.

Given that a slightly self-serving report from the BVCA this week estimated that the industry generates £1.2bn in legal fees annually in the UK, I imagine a lot of our readers share this interest so I’m going to wander outside the legal world a bit on this blog entry.

The theme of the conference, which Walker spoke at, was how the industry should react to calls for greater transparency and interaction with the media after a year in which private equity had attracted unprecedented flak. What was most striking after hearing private equity professionals talk was how polarised the debate has become between near-hysterical bashing from unions and show-boating MPs on one hand and those who believe private equity to be some form of capitalist perfection that is beyond reproach.

Such an atmosphere has led to a pronounced defensiveness on the part of the industry. For a start, many IR professionals seem to be under the impression that private equity gets a bad press, driven by union-backed campaigns. That is nonsense. The GMB-inspired push against buy-out houses was widely ignored until some vocal figures in the City started to voice reservations about taxation and supposed regulatory arbitrage. Indeed, it was reporting of Nicholas Ferguson’s comments about cleaning ladies and tax that first gave the story ‘legs’ last year.

It also seems apparent that many of the wounds the industry has suffered have been self-inflicted due to insularity, poor judgement and duff communication. It was blindingly obvious that the industry was going to face heavy scrutiny when it started bidding for household names like Alliance Boots – and if their advisers didn’t warn them so, they were sleeping on the job.

Likewise, the industry has struggled to defend the occasional deal (most private equity lawyers know which ones they are) because crass financial engineering and ruthless restructuring to hit a short-term internal rate of return aren’t that economically defensible.

Others in the industry make it even harder to sing its praises. One old-school financier at the drinks reception after Walker’s speech tried to explain to me how buy-out houses really, really don’t want to disclose more information, pay more tax or suffer any interference that would stop them hiring attractive secretaries (which you can’t do in investment banking anymore, apparently, because HR stops you). All true, I’m sure, but it does not really constitute a coherent case for the economic contribution of private equity to the nation.

Can the private equity industry learn anything from the legal industry and its own attempts to adapt to a more transparent age (the reason I was asked to speak)? Well, call me old-fashioned, but I’d say transparency tends to encourage good governance, a healthy exchange of ideas and innovation. It’s no coincidence that the UK legal services market has dramatically grown at a time when it has faced unprecedented transparency. In the short term it has sometimes been uncomfortable for law firms to get used to more scrutiny but ultimately I would argue that the UK legal industry has benefited. I suspect it will be the same for private equity.

A related observation: if you have to talk about the strength of your industry, it pays to have an idea what those strengths are. Private equity, while far from being the panacea its adherents imagine, has come a long way from the days of 1980s asset-stripping and, in many cases, has a compelling tale to tell. Compared to the inertia of plenty of public companies and the related collapse of active fund management in the 1990s, private equity looks a pretty good model.

For those that haven’t seen it, Walker’s code makes interesting reading and is well worth a look. The independently-minded banker - ironically - makes a far more eloquent case for the economic benefits of private equity than most people in the industry. City lawyers could perhaps do with their own version to talk up their contribution to the nation.

alex.novarese@legalweek.com