大象传媒

Unfair shares

• Robert Peston
• 26 Feb 07, 08:49 AM

Many of us have worked for companies whose management was rubbish. But we may have stuck it out either because we loved what we do or because we had no choice (there was nothing better available). Either way we were part of the fabric of that business, what held it together in spite of the incompetence of the managers.

These days there鈥檚 a common escape route from the descent to oblivion for badly managed companies like these: they are often taken over and bashed into shape after being acquired by the funds managed by private equity houses.

Following a private equity takeover, the mediocre managers may be kicked out and replaced by better ones, who would be massively motivated to improve corporate performance by being given equity or sold it on very attractive terms. These managers can make millions, sometimes tens of millions of pounds, if they boost the value of these businesses during the three to five years they are typically owned by private equity funds.

But, in many cases, the employees who鈥檝e stuck with the business through thick and thin get zilch, nothing, bupkis. In fact it鈥檚 worse than that, as Paul Myners pointed out last week: there鈥檚 an increase in job insecurity for all, while the business is being reconstructed under new ownership; and some will lose their jobs.

And you don鈥檛 need to look further than that to understand why the campaign against private equity led by the GMB trade union is resonating in the way that it is.

Now as Damon Buffini said to me when I interviewed him on Friday, in the medium to long term employees do benefit as and when a weak company is transformed by private equity into a more confident and competent one (which isn鈥檛 by any means always the case).

But the head of Europe鈥檚 largest private equity firm failed to address the root cause of so much criticism of private equity: the fruits of success at a business in private-equity hands are very unequally shared.

Executives in the companies owned by private equity often make personal fortunes. Partners in the private-equity management firms accumulate wealth running to tens of millions of pounds each. Investors in private equity funds will frequently make returns on their investments well above the norm.

However, if they鈥檙e lucky, staff at companies owned by private equity get to keep their jobs.

My experience of some private equity firms over many years is that they are so arms-length from the employees of their companies that they view employees as statistics to be manipulated, not as people engaged with them in a common endeavour.

This may explain why they so rarely award equity in bought-out businesses to all staff. They seem to regard the spreading of equity to all employees as an unnecessary expense, but this is short-termist in so many different ways.

Sharing the rewards more widely would defuse much of the recent criticism of unfair shares and it could improve business performance.

And it would only undermine the viability of the more marginal private equity deals. I鈥檝e run the numbers on several recent private-equity transactions. And there would still have been very rich pickings for the owners and managers if employees had been given equity that ended up being worth a few thousand pounds per person.

The charge that the spoils of private equity are unfairly divided isn鈥檛 going away any time soon. What should really have worried the Permiras, Apaxes and CVCs this weekend was an editorial in the main section of Saturday鈥檚 Daily Mail attacking the practices of their industry.

Private equity has come out of the ghetto of specialist financial publications and is now being reported on newspaper front pages in terms that are highly unflattering to it. Some of the harm being done to its reputation could have been avoided if the thousands of employees in bought-out firms had been treated as partners in a common endeavour and co-investors rather than as anonymous overheads to be slashed.

The private-equity quartet plotting a takeover of Sainsbury should take note.

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