Private equity is dirty capitalism

photo credit: Potatojunkie

Damon Buffini is the most important man you’ve probably never heard of (here’s some more “rogues” link). The managing partner of Permira, Europe’s biggest private equity outfit, he is the public face of an investment revolution that has changed the lives of millions. Put simply, private equity means that a group of investors buy up an under-performing company, usually borrowing heavily to do so; they take it off the stock markets, make it more profitable, then resell it publicly.

The model has been around for ages (it’s also known as a leveraged buyout) but there has been a massive boom in recent years. Around one in five British private sector workers is now employed by one of these outfits. Kwik-Fit, Saga and Birds Eye, for instance, are all owned by private equity groups.

However, private equity sacks staff, cuts wages, outsources, screws suppliers and often reduces services to customers. Essentially, it does capitalism’s dirty business undercover.

A company that is quoted on the stock exchange has to release quarterly financial reports. A private company has no such obligations. And these people are only in it for the short term: usually five years at the most. They have no commitment of any kind to employees, to communities or to investment in research that might take a decade or longer to prove worthwhile.

So what can the unions do about it? The unions, led mainly by the GMB and TGWU, have developed a stunt-happy, web-friendly campaigning style that has left the overpaid suits of City PR looking tired and lazy by comparison. It’s all clever stuff. To some extent, these tactics are born of necessity: union membership continues to decline and now covers just 26% of the UK workforce. But unions have been asking some pertinent questions and have often succeeded in winning the argument. If you were totting up the score, it would read: unions 1, big business 0.

What you can do

Watch Barbarians at the Gate. Private-equity firms earned the nickname “Barbarians at the Gate” after the 1988 buyout of RJR Nabisco.

F. Ross Johnson, the CEO of RJR Nabisco decides that the time is ripe to take over his own company and enlists American Express. This kicks off a tide of other firms swarming in to tender offers. The outline of the film follows the actual takeover of the RJR Nabisco empire in a tongue in cheek way.

Read this article on private equity.