A leading corporate finance adviser has spoken out in support of private equity houses following the decision by the Treasury Select Committee to hold an inquiry into the industry.
Mike Reeves, partner with Clearwater Corporate Finance, says private equity companies play a valuable role in driving the UK and the world economy and in maximising shareholder value. He says it is a misconception to accuse them of being asset strippers who place short-term profits above the long-term interests of the companies they invest in, or of lacking accountability.
In 2006 it is estimated that European private equity companies raised over 70 billion euros for investment – compared to less than 10 billion ten years before. Globally, almost one in five of all mergers and acquisitions were supported by private equity investors. The unions have waged a campaign for the industry’s activities to be subject to greater scrutiny and for tax breaks to be ended.
However Mike Reeves says: “Of course private equity houses focus on profits – every business does. Their aim is to maximise shareholder value and they do so very successfully. Pension funds account for a significant proportion of private equity funding and in return receive a large share of the profits.
If private equity companies didn’t seek to maximise value, they would effectively be reducing the value of people’s pensions and acting against the nation’s long-term interests.
“Private equity investors take a more strategic approach than public limited companies. As they are not subject to the same pressures to achieve steady earnings growth and pay regular dividends, they have greater autonomy to make decisions that benefit the longer-term interests of the business. They are also more likely to return funds to investors when they are not required, thus creating better shareholder value.
“There has been criticism about private equity companies engaging in highly leveraged deals, however it is not in their interests to take on debt levels a business cannot afford to repay. As for accountability, private equity houses are answerable to their investors. In my experience, they are probably more attuned to corporate governance than most public companies.”
Reeves says private equity is now an established feature within the economy. “Private equity is here to stay. The reason investors support it is that it provides superior returns. Public companies who want to avoid unwelcome attention from private equity buyers would do well to sharpen up their own act, ensure they are achieving maximum efficiency and creating the best possible value for shareholders.”