The global private equity industry has thrived in the pandemic, with trillions of dollars spent on deals, and buyouts of London-listed companies reaching their highest level in decades. Much of private equity may indeed be a force for good, as Oakley Capital’s Steven Tredget told Dave Baxter in a recent IC podcast, but the growing power of the sector is reigniting old tensions between company bosses and employees.
The TUC this week expressed dismay at the shifting ownership of UK public companies to foreign investors with “obscured identities” who now reap the rewards of workforces’ labour. It blames what it describes as the tilting of boardroom decision making away from reinvestment and towards value extraction on the prevalence of these new types of owners.
The TUC isn’t alone in pushing back on the disconnect between new owners and workforces or in arguing that employees are the key drivers of a company’s success – much more important than shareholders who bring funds for investing, research and paying off debt. A recent paper from think tank The Institute of Employment Rights (IER) by Ben Crawford argues that the sole aim of the private equity model is the extraction of maximum returns for investors. What Crawford finds most problematic is private equity’s claims on the future revenues of the companies they acquire. He points to studies showing that premiums paid in buyouts are typically recovered through job destruction and wage cuts, and that cash flow must be diverted to cover interest and debt repayments. He reminds us that when Bain Capital and KKR took over Toys ‘R’ Us in 2007 the interest payments on the new $3.5bn debt already outstripped existing profits.