1、Private equity in Europe: concerns, evidence, outlook,Andrew Watt, European Trade Union Institute (ETUI), Brussels,Presentationto The private sector turn: Private equity, financial intermediaries and what they mean for development London, 22 November 2010,Andrew Watt etui (2010),2,Overview,PE in Eur
2、ope business model, rise, fall and ?Review of the evidence in issues of concernPE and the crisis,Authors summary of information in literature,How PE functions relations with counterparties,Fees (2%),BANKS,Capital 95%,returns,LP (pension funds, wealthy individuals),GP, PE firm,PE fund,Target company,
3、20% carry above 8%,Capital gains (resale, disposals, recaps),Loans 50-80%,Capital investment 20-50%,Own investment 5%,Debt service (interest, capital),Loans 50-80%,Target company,Capital investment 20-50%,Andrew Watt etui (2010),4,Characteristics of business model,Capital gains model (not longer-ter
4、m returns): purchase-restructure-sell Returns from sales price purchase price Dividend recapitalisations Sales of assets (in extreme cases: asset stripping) Illiquid (average ownership of target company ca. 5 yrs) High risk investments (illiquidity plus substantial leverage) Sensitive to stock marke
5、t developments and cost of external capital (cyclical) Focus on target companies with assets that can be used as collateral (or sold) and steady cash flow Incentivisation of managementAs outsiders no non-economic involvement, little obligation to maintain implicit contracts with stakeholders, especi
6、ally workers,Andrew Watt etui (2010),5,Rise and (temporary?) fall in PE in Europe,Source: CMBOR,Andrew Watt etui (2010),6,Issues of concern for European workers and companies,Cuts in employment and pay, increased intensity of work and worsened working conditions in target companies in order to gener
7、ate higher returns to owners, impact on information and consultation rights and collective bargaining Taxation carried interest. deductibility of debt PE firms and offshore transactions (reduce tax revenues to government and raise inequality) Transparency and reporting (loss of valuable data when fi
8、rms taken private) Leverage, risk of insolvency (micro) and financial stability (macro) Workers pension funds (returns, risk) Short-termism (impact on long-term investment in both PE and non-PE companies Conflicts of interest and market abuse,Andrew Watt etui (2010),7,Some fundamental problems with
9、the data and research approaches,Definitional issues (e.g. inclusion of venture capital) Data on PE-owned companies not freely available (taken private) Surveys conducted or commissioned by PE trade associations (even academic ones): essentially no clean public data Limited response rate to surveys
10、and survivorship bias: representativity problems What is the counterfactual? (what benchmark? PE companies not randomly selected) PE universe very diverse, particularly with respect to deal size (averages may tell us little, problem for case-study approach) Extrapolating from micro to macro level -
11、review of the literature,Andrew Watt etui (2010),8,Review of findings: Is value genuinely added?,Some focus on share price/sales price at firm level: May reflect picking winners, hoodwinking buyers etc. (Weir et al. 2005; Ernst&Young 2008) But Cao/Lerner (2007) find the longer-term performance of fo
12、rmer LBOs outperform other IPOs and the stock market as a whole (greater variance, representativity) Cumming/Siegel/Wright review productivity studies at plant level: LBOs and especially MBO enhance performance and have a salient effect on work practices (17) Gottschalg 2007 provides evidence of abo
13、ve-average growth and performance (but greater variance) Conclusion: seems likely that PE on average adds value to the firm (i.e. capital owners) but more variance but extent to which genuine value creation rather than value appropriation not clear,Andrew Watt etui (2010),9,Review of findings: Rates
14、 of return (to whom?),Complex comparisons because LPs have to hold funds on standby prior to investment in target company, returns from PE are lumpy and allowance should be made for risk and illiquidity, Also reporting and survivorship bias problems. EVCA: All PE 10.8% (VC 5.5%, BO 14.4%) funds sinc
15、e 1980, net (press release June 2007) Wright et al 2007 cite several studies suggesting returns are relatively high Numerous academic studies (Kaplan and Schoar 2005, Dillich and Kaserer 2007, EP-commissioned study 2007) suggest strongly that overall net returns are below stock market average (negat
16、ive alpha), even if gross returns outperform stockmarket (high fees and carry) Conclusion: GPs of successful PE firms earn fantastic returns, LPs of successful PE firms above-average returns. Variation in returns is much higher than with other forms of investment. On average though net returns almos
17、t certainly lose to and even probably below stock-market averages despite higher illiquidity and risk.,Andrew Watt etui (2010),10,Review of findings: Employment losses?,Industry-commissioned studies (EVCA 2005, BVCA 2006) methodologically problematic (worthless Hall 2007) OECD commissioned study (Wr
18、ight et al. 2007) reviews other academic studies and reports mixed results. Amess/Wright 2006 showan interesting distinction between MBOs and MBIs MBOs are shown to raise employment (exploiting strategic opportunities), MBIs to cut employment (restructuring, breaking implicit contracts). Effects sma
19、ll (+0.5% and -0.8% p.a.) Case studies (HBS, IUF) often report large employment cuts (although often linked to divestment) WEF (2008) largest study, control group net impact on employment in existing establishments is negativ and substantial: after 5 years employment 10% lower than control group Con
20、clusion: Numerous studies with a mixed picture. Distribution of individual cases almost certainly very wide. Overall, employment losses from more intensive restructuring. Q whether the jobs in these firms were sustainable. Cannot extrapolate to macro employment levels. Huge counterfactual problems p
21、lus problem of differentiating organic from acquisition/divestment-driven growth,Andrew Watt etui (2010),11,Review of findings: Wage cuts and working conditions?,Fewer studies However, Amess/Wright 2006 show negative wage effects for BOTH MBOs and MBIs compared with benchmarks. For Germany case stud
22、ies have been conducted by the Hans-Boeckler Foundation (HBS) and Kaeserer (2007). The findings of the former are geerally negative, the latter more positive. However, these cases cannot claim representativity and not benchmarked. There is little evidence on working conditions. Wright et al (2007) r
23、eport evidence for UK and NL that HRM practices modernised working practices (flatter hierarchies, more empowerment in MBO firms) Conclusion: evidence base very limited, but impacts seem more negative than for employment,Andrew Watt etui (2010),12,Review of findings: The impact on worker representat
24、ion,Little systematic research here. The EVCA notes that it is bound by national industrial relations and codetermination legislation. However, conformity with the law requires enforcement and there is still space for a substantial deterioration in actual standards from workers point of view. The HB
25、S case studies are particularly critical of issues regarding worker representation and codetermination rights. The IUF Private Equity Buyout Watch Update lists company cases where trade unions, collective bargaining structures and worker participation is disregarded by new owners. Confirmed by Thorn
26、ton 2007 for UK. More broadly, the vanishing employer is a frequent complaint of trade unions in the context of LBOs by PE (e.g. TUC 2007). Where trade unions have a strong organisation position (and even use takeover to increase membership) and company prospects are good, they can bargain effective
27、ly with incoming PE owners. Even for turnarounds PE may see workers representatives as a positive resource (Mitbestimmung 06/2006). Conclusion: only limited evidence that PE at company level marks an attack on Rhineland capitalism and introduction of Anglo-Saxon practices. PE as purely instrument at
28、titude to WR and weighs costs and benefits of cooperation and conflict.,Andrew Watt etui (2010),13,Review of findings: Taxation is value appropriated at taxpayers expense?,PE business model clearly tailored to reducing tax liability. In a number of areas taxation systems seem to privilege PE model i
29、n a discriminatory way: Much income of GPs taxed as capital gains at much lower rates that earned income (e.g. 10% vs. 40% in UK) Interest payments on bank loans tax deductible (privileging of debt over equity) Use of non-domiciliation and tax havens In DE PE is not considered a business at all at d
30、oes not pay Gewerbesteuer. Government studies (e.g. DK, UK, DE) have calculated the impact on public finances of PE takeovers and regulatory action has already been taken (DK: ceiling on interest deduction) PE representatives themselves have recognised that lack of willingness to pay tax (less than
31、my cleaning lady) is an image issue Conclusion: Transfer from taxpayers an important source of PE revenues. Also distorts firms performance comparison,Review of findings: Short-termism and investment,Conclusion: Complex discussion and lack of empirical evidence. Claim not easy to sustain at micro le
32、vel. At macro level complexand testing validity requires further work,Andrew Watt etui (2010),15,Review of findings: Leverage and micro and systemic risk,PE funds themselves not leveraged, but portfolio companies often highly leveraged Corporate management literature identifies disadvantage of highe
33、r gearing in terms of increased bankrupcy risk PE holding a portfolio may encourage greater risk-taking (Achmidt/Spindler 2007) Empirical evidence of higher bankruptcy rates (WEF 2008, Wright et al. 2007), but perhaps due to turnaround strategies Systemic risks have received attention (ECB, FSA). Fi
34、ndings sugest that collapse of PE firms and bank defaults highly likely. Cyclical turnaround, higher effective interest rates and now stock market collapse deadly combination for PE funds with large recent acquisitions. Major changes in PE practices under way. Authorities unconcerned about systemic
35、impact because of small size of PE relative to bank assets (sounds familair?),Andrew Watt etui (2010),16,Conclusions of pre-crisis research,The PE business model, the expansion of the industry and the increasing size of firms taken private call for a transparent and open public debate. Private equit
36、y is not a purely private transaction. Data on the industry must be made publicly available and analysed scientifically and independently. While the overall evidence is often patchy, PE practices are in some cases at least detrimental to the legitimate interests of other stakeholders in a number of
37、areas. But PE practices are highly diverse and heterogeneous. It is scarcely possible to generalise about PE-owned companies as such. PE clearly exploiting loopholes in existing national and European (Takeover Directive) that should be closed Any regulatory activity must attempt to curb excesses and
38、 resolve problems without blocking a positive role for PE in resolving succession problems, restructuring etc.PE activities must be seen in context (e.g. reflections on the way publicly listed companies are regulated) and also broader issues of the financialisation of the economy (not dealt with her
39、e). PE likely to emerge from crisis partially chastened, but the Barbarians will be back,Andrew Watt etui (2010),17,PE in the crisis,Why is the crisis such a threat to PE (owned companies)? On top of the squeeze on companies in general (plunging exports, demand) the combination of higher cost of deb
40、t and massive fall in equity prices potentially deadly mixture Higher rates of interest on bonds (and tighter lending criteria) raise the opoerating costs of PE-owned firms. Those portfolio companies with lower than expected sales will either have to draw on additional capital from the firms, or the
41、 will go bankrupt, or PE will be forced to exit Dramatic losses on stock markets make a successful exit strategy very difficult, even for well-run companies. Some evidence also that PE favoured firms heavy in real estate,Andrew Watt etui (2010),18,Dow Jones and Dax fell around 40%,Andrew Watt etui (
42、2010),19,Much more expensive for firms to obtain bond financing,Andrew Watt etui (2010),20,What now for PE in Europe,Source: CMBOR,Andrew Watt etui (2010),21,What now for PE in Europe?,Source: CMBOR: “The sharp build up in buyout receiverships during the recession that followed the first buyout wave
43、 in the early 1990s is striking and indicates a likely future trend in the recession now unfolding. It is also notable that those buy-outs completed during peak years of the first wave, 1988-90, had the highest failure rate.” (Wright/Bacon forthcoming),Figure 3: Receiverships of Buy-outs (UK),Andrew
44、 Watt etui (2010),22,What now for PE in Europe?,So far there does not seem to have been a massive wave of bankruptcies of PE-owned companies Possible explanations: PE negotiated very favourable loan deals with banks the banks then take a hit rather than PE companies themselves PE companies used plan
45、ned borrowing and credit lines not for planned investment but to ensure survival during the crisis Repayment obligations so far have been limited and the worst is yet to come.,A Looming Refinancing Crisis?,Source: Moodys $640 billion and 640 days later“,Distressed Exchange vs. Bankruptcy,Source: Moodys Private Equity 2009,Andrew Watt etui (2010),25,What now for PE in Europe?,Some funds were waiting to deploy resources when the crisis struck They had the option of waiting and picking up companies at discounts of around 40% Smart money PE funds will be back for another round of deals!,
