Wednesday, 21 January 2009

Taking us to the cleaners?

Financial booms and busts kick new words, concepts and forms of finance into the public arena. The dotcom bubble introduced the world to the venture capitalist. In the run up to the credit crunch we discovered Private Equity or what used to be called a leveraged buy-out. Private equity we were led to believe was brilliant. It aligned the interests of managers and owners to an extent that would have made Marx dizzy given he failed to anticpate the emergence of a managerial capitalism based on executives and institutional investors.

Private Equity also became a bogeyman in the run up to the start of the credit crunch in August 2007 because of its tendency to pay investment managers squillions at the same time (as the Work Foundation neatly documented) as people working in the companies being bought and sold tended to be subjected to what are called "aggressive HR policies" e.g. less job security, relatively lower pay rises, higher targets and so on. Oh and the private equity chaps benefitted from some wonderfully beneficial tax arrangements or as one Private Equity bod put it millionaire financiers were paying less tax in relative terms than their office cleaners.

Come the credit crunch and everyone started casting their envious glances elsewhere including the parliamentary Treasury Select Committee. But, 2 things suggest we should have another look. The first was a study published by the British Venture Capital Association this January that clearly stated the single most important contributor to private equity companies outperforming their publically listed peers was borrowing more money more cheaply. There, its not rocket science, or incentives or whatever, its simply the ability to arrange a deal and swap debt for equity to an extent that in the current environment increases the risk attached to a business.

Or does it? You see second thing is the Treasury statement on its new Asset Protection Scheme i.e. insurance policy for bank debt. This states

"The following categories of assets will be eligible for the Scheme, subject to assessment by the Treasury for inclusion on a case-by-case basis:
  • Portfolios of commercial and residential property loans most affected by current economic conditions;
  • structured credit assets, including certain asset-backed securities;
  • certain other corporate and leveraged loans;
  • and any closely related hedges, in each case, held by the participating institution or an affiliate as at 31st December 2008.

5.2 The Treasury may consider the inclusion of other asset classes in the Scheme, subject to appropriate investigation by the Treasury and its advisers and the determination of an appropriate fee."

In other words there is clear scope for government to land taxpayers with a dirty great contingent obligation that effectively bails out private equity investors who overpaid for assets using cheap credit in the run up to the credit crunch. Go figure. There again as I'm sure every cleaner currently hoovering under some private equity investment director's desk will confirm they do create jobs.

P.S. apologies for the pun in the title

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