2007 was a gala year for private equity (PE) investments in India</t= itle> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"place" downloadurl=3D"http://www.5iantlavalamp.com/"/> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"country-region" downloadurl=3D"http://www.5iantlavalamp.com/"/>  <style>  </style>  </head> <body lang=3DEN-US style=3D'tab-interval:.5in'> <div class=3DSection1> The Dark Side of Private Equity Funds= <o:p></o:p> <o:p> </o:p> Kavaljit Singh<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <o:p> </o:p> Year 2007 was a gala one for private equity (PE) investments in <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">India= </st1:country-region></st1:place>. During the year, the total number of PE deals stood at 386 with a value of US$17 billion, as compared to 302 deals with a value of $7 billion in 2006.= The private equity firms are investing in a range of businesses in <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">India</st1:country-region></st1= :place> including infrastructure, telecom, financial services, healthcare and real estate sectors. With more and more Indian companies willing to go private, private equity has become the latest fad in the investment game. But how many of us really know about private equity? H= ow many of us have heard about Blackstone Group, the Carlyle Group, Bain Capit= al, TPG Capital and Kohlberg Kravis Roberts & Co. (KKR) – the five la= rgest PE firms in the world? These five firms together manage assets worth hundre= ds of billions of dollars. Their influence over the real economy can be gauged from the fact that these five PE firms control companies that employ more t= han 2 million workers. The Blackstone Group, which started as a two-man team fr= om a single room, now has close to 350,000 employees at its acquired companies worldwide. And more than 500,000 employees work at KKR-controlled firms. <o:p> </o:p> Some of the well-known global companies and brands (su= ch as Burger King, Jimmy Choo, Toys “R” Us, Dunkin’ Donuts a= nd Polaroid) are now owned by private equity firms. Private equity firms are increasingly becoming the employer of choice for politicians, senior govern= ment officials and celebrities. <o:p> </o:p> <div style=3D'mso-element:para-border-div;border:solid windowtext 1.0pt; mso-border-alt:solid windowtext .5pt;padding:1.0pt 4.0pt 1.0pt 4.0pt'> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'><o:p> </o:p> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'>Box: You Too?<o:p></o:p> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'><o:p> </o:p></= b> What do Bono, Jack Wel= ch, John Major, George Bush (senior), Fidel Ramos, Arthur Levitt and James D. Wolfensohn have in common? They all are in the business of private equity. Bono, the lead singer of Irish rock band U2 and anti-poverty campaigner, is= a partner in a private equity firm, Elevation Partners, which specializes in media and entertainment deals. This firm also partly owns Forbes Magazine. Jack Welch, the former CEO of General Electric, is a special part= ner at Clayton, Dubilier & Rice, Inc. <o:p> </o:p> John Major, George Bush (senior), Fidel Ramos (former President of Philippines) and Arthur Levitt (former chairman of the Securities and Exchange Commission of the <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:pl= ace>) have been at the service of Carlyle Group in various capacities. James D. W= olfensohn, former president of the World Bank, founded Wolfensohn & Co. LLC in 199= 5, a private equity firm which invests in emerging markets. <o:p> </o:p> Paul O’Neill, fo= rmer US’s Treasury Secretary, joined Blackstone as a special advisor in Ma= rch 2003. While Mitt Romney, who co-founded Bain Capital Partners, is a Republi= can candidate in the 2008 <st1:place w:st=3D"on"><st1:country-region w:st=3D"on= ">US</st1:country-region></st1:place> presidential election. <o:p> </o:p> - Kavaljit Singh </div> <o:p> </o:p> What is Private Equity?<o:p></o:p> <o:p> </o:p> Private equity is a broad term used to define any type= of equity investment in an asset or a company that is not listed on a public s= tock exchange. Therefore, the purchase of shares in a company is privately negotiated. The shares of a company could be acquired through the sale of existing shares by shareholders or private placement of new shares. <o:p> </o:p> Because of heavy dependence on leveraged buyout (buyin= g a company through significant amount of borrowed money) to raise money, a pri= vate equity fund and a buyout fund have almost become interchangeable in the <st= 1:country-region w:st=3D"on">US</st1:country-region> and <st1:place w:st=3D"on">Europe</st1:= place>. <o:p> </o:p> Unlike investment in stock or bond markets, returns on private equity are not linked to the performance of a market or index. The private equity industry works on 2:20 principle. Typically, General Partners (the management firm which has unlimited liability) are compensated with an annual management fee of 2 per cent of committed capital. Thus, a $10 billi= on fund can generate $200 million a year for a PE fund in management fees alon= e. In addition, the general partner is entitled to ‘carried interest,= 217; a performance fee paid to managers, based on the profits generated by the f= und. Typically, the general partner gets carried interest of 20 per cent of prof= its. No wonder, the key partners at some of the largest private equity firms have become billionaires. According to Forbes, the top 20 managers of pri= vate equity and hedge funds at Wall Street pocketed an average of $657 million in 2006. This compensation is 22,255 times the pay of an average <st1:place w:= st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:place> worker. <o:p> </o:p> Limited Partners (the investors, who have limited liability and are not involved with the day-to-day operations) receive inco= me, capital gains and tax benefits. Financing in private equity operations is in the form of both equity and debt. In a typical leveraged buyout deal, the private equity fund puts in just one-fourth and the remaining three-fourths= of the total capital is financed through debt. <o:p> </o:p> The Process<o:p></o:p> <o:p> </o:p> The buyout process starts by taking a public listed company completely private. The proponents of PE firms argue that private ownership frees companies from the short-term pressures of the stock market= s, and thereby enabling them to invest for the long term. <o:p> </o:p> But the main reason is somewhat else. Unlike privately owned companies, public-listed companies are required to disclose a number = of information about its operations to the shareholders, regulators and the general public. The disclosure of information may invite closer scrutiny and demands from diverse shareholders, public interest groups, environmentalists and trade unions. By going private, PE firms can bypass the responsibility = of complying with regulations (such as Sarbanes-Oxley Act in the <st1:place w:st=3D"on">= <st1:country-region w:st=3D"on">US</st1:country-region></st1:place>) and carry out its activit= ies free of oversight and public accountability. The exact operations of the acquired companies are not even revealed to the limited partners of the PE funds. So the lack of transparency is an essential part of PE business mode= l. <o:p> </o:p> Apart from providing capital, private equity funds also provide business expertise and usually assume complete management control of the companies in which they invest. PE managers micromanage the firms they = buy. Besides joining the board of the portfolio company, PE funds also have a fi= nal say over how the company is run. The buyout firms save on cash flow by cutt= ing cost and minimizing investment. They may fire workers and oversee change in= senior management if required. <o:p> </o:p> It is important to note that PE firms typically invest= in only those companies that generate higher cash flows rather than growth companies. The target company’s cash flow plays a key role in the decision since it determines the company’s ability to service debt including additional debt incurred as part of its restructuring. In many developed countries, PE firms have intentionally bought companies that have lower growth prospects but higher cash flows. <o:p> </o:p> The main intention of PE firms is to increase the valu= e of the companies through restructuring, generally over a three to five year ti= me span, and then exit through an initial public offering (IPO) by listing its shares in the stock market or sale to another private equity or strategic investor. <o:p> </o:p> In a nutshell, PE firms buy companies not to own and r= un them with a long-term perspective (as foreign direct investors such as Siem= ens or Vodaphone might do) but they are essentially buy-to-sell investors. <o:p> </o:p> Improving Operational Efficiency or Quick Flipping?= <o:p></o:p> <o:p> </o:p> Recent evidence suggests that PE funds are undertaking buyout deals with short-term investment horizons. Increasingly, many private equity funds are making quick profits through management fees and financial engineering rather than improving the operational efficiencies of acquired companies with a long-term perspective. To illustrate this point, take the = case of buyout of Hawkeye Holdings. Three weeks after PE firm Thomas H. Lee Part= ners agreed to buy Hawkeye Holdings in May 2006, the company filed registration papers with the US Securities and Exchange Commission to launch an initial public offering. Hence, no efforts were made by PE firm to restructure and polish the company, which is stated to be the raison d’etre of private equity industry. <o:p> </o:p> PE firms have a natural tendency to increase a portfol= io company’s indebtedness to pay themselves large dividends and thereby quickly recoup their initial investments. Firms are extracting record divid= ends within months of buying companies, often financed by loading them up with additional debt. It is not uncommon to find PE firms declaring a billion do= llar dividend. Take the case of Warner Music Group which was bought for $1.25 billion in 2003 by a group of PE firms consisting of Thomas H. Lee Partners, Bain Capital and Providence Equity. Within months of acquisition, Warner Mu= sic made dividends, advisory fees and other payments of $1.43 billion to PE own= ers. In other words, the company paid off all the equity originally committed by= the buyout group. The promises made by PE firms at the time of acquisition of Warner Music are yet to be materialized. On the contrary, the performance of Warner Music has been deteriorating with no improvement in revenues and profits. The company suffered a loss of $27 million in the first quarter of 2007. <o:p> </o:p> Another example is Celanese, a US-based chemical compa= ny, which was bought by the Blackstone Group for $3.8 billion in May 2004. In t= his deal, Blackstone had put in about $650 million in cash equity. However nine months later, Blackstone paid itself $500 million in dividends. Besides, Blackstone also cornered $45 million from Celanese as advisory fees. <o:p> </o:p> The Period of Boom<o:p></o:p> <o:p> </o:p> In 2007, the global PE market witnessed some of the biggest buyout deals ever.= The US-based energy company, Texas Utility, was acquired by KKR and TPG Capital= for $45 billion, while Blackstone took over the control of Equity Office Proper= ties (US) for $39 billion and announced its $26 billion purchase of the Hilton Hotels chain. In the month of July 2007 alone, private-equity buyouts total= ed $64 billion. <o:p> </o:p> This raises a moot question: why is th= e private equity business booming so much? The answer lies in the global financial </= span>market conditions which have been very conducive for PE industry since 2003, with = low interest rate regime, worldwide glut of capital, buoyant credit markets, and massive growth of structured credit products such as collateralized debt obligations. The low interest rate regime encouraged wealthy investors to l= ook out for more remunerative alternative investment options such as private equity. Big investors prefer to invest in a big PE fund rather than holding direct stakes in several companies. Pension funds find it convenient to inv= est in a PE fund rather than investing in a diversified portfolio of companies.= <o:p> </o:p> The Bust?<o:p= ></o:p> <o:p> </o:p> Following the eruption of sub-prime mortgage crisis in= the <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-regi= on></st1:place> in mid-2007 and the subsequent squeeze in the global credit markets, a slow= down in the pace of buyout deals by PE firms has been noticed. The turbulence in credit markets has negatively affected the global private equity industry w= hich largely banks on borrowings to acquire companies. Lenders are demanding hig= her interest rates and tighter conditions on buyout loans. <o:p> </o:p> Thus, the PE industry is facing a severe resource crun= ch. Several mega deals have been held up. Financing packages for the acquisitio= ns of Alliance Boots, Chrysler, First Data and Cadbury Schweppes have been postponed. It will be more difficult and more expensive for PE firms to bor= row money for buyouts. <o:p> </o:p> Spaces for Intervention<o:p></o:p> <o:p> </o:p> By and large, NGOs, citizens’ groups and corpora= te researchers have not given much attention to private equity issues. To a la= rge extent, the technicalities and complexities involved in the business of pri= vate equity explain this gap. <o:p> </o:p> If peoples’ movements are strong, alert and influential, PE industry could be brought under a strict regulatory framewo= rk. The PE industry could be forced to play by the same set of regulations as o= ther businesses. If banks, pension funds and other financial institutions are regulated, why should private equity be an exception? The demand for workers and communities stakeholders having a say in the buyout deals is not only desirable but feasible too. <o:p> </o:p> With the help of labor unions and other civil society actors, a concerted effort to educate and persuade public, workers, policymakers and media can bring necessary mechanisms to ensure greater regulatory oversight and public accountability of PE industry. <o:p> </o:p> However, the biggest obstac= les are political. Thanks to political patronage, global private equity industry operates free of regulatory oversight and public accountability. In the <st= 1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:pl= ace>, for instance, private equity industry is politically well organized. Sensing trouble over tax and transparency issue, the US-based private equity firms = not only activated their own lobby groups but also formed alliances with other industries such as real estate, energy and venture capital in order put for= ward a united front to oppose proposed tax rate hike. <o:p> </o:p> What is amazing is that des= pite their sharp internal differences, the US-based PE firms joined hands to lau= nch Private Equity Council in February 2007 in order to collectively fight agai= nst moves for greater regulation. <o:p> </o:p> Is this strategy worth emulating by civil society actors? <o:p> </o:p> Source: Civil Society, February 2008<o:p></o:p> <o:p> </o:p> </div> </body> </html> ------=_NextPart_01C9EE7D.FB489350 Content-Location: file:///C:/8E9C44F3/TheDarkSideofPrivateEquityFunds_files/header.htm Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" <html xmlns:v=3D"urn:schemas-microsoft-com:vml" xmlns:o=3D"urn:schemas-microsoft-com:office:office" xmlns:w=3D"urn:schemas-microsoft-com:office:word" xmlns:st1=3D"urn:schemas-microsoft-com:office:smarttags" xmlns=3D"http://www.w3.org/TR/REC-html40"> <head> <meta http-equiv=3DContent-Type content=3D"text/html; charset=3Dus-ascii"> <meta name=3DProgId content=3DWord.Document> <meta name=3DGenerator content=3D"Microsoft Word 11"> <meta name=3DOriginator content=3D"Microsoft Word 11"> <link id=3DMain-File rel=3DMain-File href=3D"../TheDarkSideofPrivateEquityF= unds.htm"> <![if IE]> <base href=3D"file:///C:\8E9C44F3\TheDarkSideofPrivateEquityFunds_files\header.ht= m" id=3D"webarch_temp_base_tag"> <![endif]><o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"place" downloadurl=3D"http://www.5iantlavalamp.com/"/> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"country-region" downloadurl=3D"http://www.5iantlavalamp.com/"/> </head> <body lang=3DEN-US> <div style=3D'mso-element:footnote-separator' id=3Dfs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1 width=3D"33%"> <![endif]> </div> <div style=3D'mso-element:footnote-continuation-separator' id=3Dfcs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1> <![endif]> </div> <div style=3D'mso-element:endnote-separator' id=3Des> <![if !supportFootnotes]> <hr align=3Dleft size=3D1 width=3D"33%"> <![endif]> </div> <div style=3D'mso-element:endnote-continuation-separator' id=3Decs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1> <![endif]> </div> <div style=3D'mso-element:footer' id=3Def1> <div style=3D'mso-element:frame;mso-element-wrap:around;mso-element-anchor-= vertical: paragraph;mso-element-anchor-horizontal:margin;mso-element-left:right; mso-element-top:.05pt;mso-height-rule:exactly'> <table cellspacing=3D0 cellpadding=3D0 hspace=3D0 vspace=3D0 align=3Dright> <tr> <td valign=3Dtop align=3Dleft style=3D'padding-top:0in;padding-right:0in; padding-bottom:0in;padding-left:0in'> <p class=3DMsoFooter style=3D'mso-element:frame;mso-element-wrap:around; mso-element-anchor-vertical:paragraph;mso-element-anchor-horizontal:margi= n; mso-element-left:right;mso-element-top:.05pt;mso-height-rule:exactly'><!-= -[if supportFields]>PAGE= <![endif]--><o:p></o:p> </td> </tr> </table> </div> <o:p> </o:p> </div> <div style=3D'mso-element:footer' id=3Df1> <div style=3D'mso-element:frame;mso-element-wrap:around;mso-element-anchor-= vertical: paragraph;mso-element-anchor-horizontal:margin;mso-element-left:right; mso-element-top:.05pt;mso-height-rule:exactly'> <table cellspacing=3D0 cellpadding=3D0 hspace=3D0 vspace=3D0 align=3Dright> <tr> <td valign=3Dtop align=3Dleft style=3D'padding-top:0in;padding-right:0in; padding-bottom:0in;padding-left:0in'> <p class=3DMsoFooter style=3D'mso-element:frame;mso-element-wrap:around; mso-element-anchor-vertical:paragraph;mso-element-anchor-horizontal:margi= n; mso-element-left:right;mso-element-top:.05pt;mso-height-rule:exactly'><!-= -[if supportFields]>PAGE= <![endif]-->1<!-= -[if supportFields]></span= ><![endif]--><o:p></o:p> </td> </tr> </table> </div> <o:p> </o:p> </div> </body> </html> ------=_NextPart_01C9EE7D.FB489350 Content-Location: file:///C:/8E9C44F3/TheDarkSideofPrivateEquityFunds_files/filelist.xml Content-Transfer-Encoding: quoted-printable Content-Type: text/xml; charset="utf-8" <xml xmlns:o=3D"urn:schemas-microsoft-com:office:office"> <o:MainFile HRef=3D"../TheDarkSideofPrivateEquityFunds.htm"/> <o:File HRef=3D"header.htm"/> <o:File HRef=3D"filelist.xml"/> </xml> ------=_NextPart

MIME-Version: 1.0 Content-Type: multipart/related; boundary="----=_NextPart_01C9EE7D.FB489350" This document is a Single File Web Page, also known as a Web Archive file. If you are seeing this message, your browser or editor doesn't support Web Archive files. Please download a browser that supports Web Archive, such as Microsoft Internet Explorer. ------=_NextPart_01C9EE7D.FB489350 Content-Location: file:///C:/8E9C44F3/TheDarkSideofPrivateEquityFunds.htm Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" 2007 was a gala year for private equity (PE) investments in India</t= itle> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"place" downloadurl=3D"http://www.5iantlavalamp.com/"/> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"country-region" downloadurl=3D"http://www.5iantlavalamp.com/"/>  <style>  </style>  </head> <body lang=3DEN-US style=3D'tab-interval:.5in'> <div class=3DSection1> The Dark Side of Private Equity Funds= <o:p></o:p> <o:p> </o:p> Kavaljit Singh<o:p></o:p> <o:p> </o:p> <o:p> </o:p> <o:p> </o:p> Year 2007 was a gala one for private equity (PE) investments in <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">India= </st1:country-region></st1:place>. During the year, the total number of PE deals stood at 386 with a value of US$17 billion, as compared to 302 deals with a value of $7 billion in 2006.= The private equity firms are investing in a range of businesses in <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">India</st1:country-region></st1= :place> including infrastructure, telecom, financial services, healthcare and real estate sectors. With more and more Indian companies willing to go private, private equity has become the latest fad in the investment game. But how many of us really know about private equity? H= ow many of us have heard about Blackstone Group, the Carlyle Group, Bain Capit= al, TPG Capital and Kohlberg Kravis Roberts & Co. (KKR) – the five la= rgest PE firms in the world? These five firms together manage assets worth hundre= ds of billions of dollars. Their influence over the real economy can be gauged from the fact that these five PE firms control companies that employ more t= han 2 million workers. The Blackstone Group, which started as a two-man team fr= om a single room, now has close to 350,000 employees at its acquired companies worldwide. And more than 500,000 employees work at KKR-controlled firms. <o:p> </o:p> Some of the well-known global companies and brands (su= ch as Burger King, Jimmy Choo, Toys “R” Us, Dunkin’ Donuts a= nd Polaroid) are now owned by private equity firms. Private equity firms are increasingly becoming the employer of choice for politicians, senior govern= ment officials and celebrities. <o:p> </o:p> <div style=3D'mso-element:para-border-div;border:solid windowtext 1.0pt; mso-border-alt:solid windowtext .5pt;padding:1.0pt 4.0pt 1.0pt 4.0pt'> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'><o:p> </o:p> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'>Box: You Too?<o:p></o:p> <p class=3DMsoNormal align=3Dcenter style=3D'text-align:center;mso-layout-g= rid-align: none;text-autospace:none;border:none;mso-border-alt:solid windowtext .5pt; padding:0in;mso-padding-alt:1.0pt 4.0pt 1.0pt 4.0pt'><o:p> </o:p></= b> What do Bono, Jack Wel= ch, John Major, George Bush (senior), Fidel Ramos, Arthur Levitt and James D. Wolfensohn have in common? They all are in the business of private equity. Bono, the lead singer of Irish rock band U2 and anti-poverty campaigner, is= a partner in a private equity firm, Elevation Partners, which specializes in media and entertainment deals. This firm also partly owns Forbes Magazine. Jack Welch, the former CEO of General Electric, is a special part= ner at Clayton, Dubilier & Rice, Inc. <o:p> </o:p> John Major, George Bush (senior), Fidel Ramos (former President of Philippines) and Arthur Levitt (former chairman of the Securities and Exchange Commission of the <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:pl= ace>) have been at the service of Carlyle Group in various capacities. James D. W= olfensohn, former president of the World Bank, founded Wolfensohn & Co. LLC in 199= 5, a private equity firm which invests in emerging markets. <o:p> </o:p> Paul O’Neill, fo= rmer US’s Treasury Secretary, joined Blackstone as a special advisor in Ma= rch 2003. While Mitt Romney, who co-founded Bain Capital Partners, is a Republi= can candidate in the 2008 <st1:place w:st=3D"on"><st1:country-region w:st=3D"on= ">US</st1:country-region></st1:place> presidential election. <o:p> </o:p> - Kavaljit Singh </div> <o:p> </o:p> What is Private Equity?<o:p></o:p> <o:p> </o:p> Private equity is a broad term used to define any type= of equity investment in an asset or a company that is not listed on a public s= tock exchange. Therefore, the purchase of shares in a company is privately negotiated. The shares of a company could be acquired through the sale of existing shares by shareholders or private placement of new shares. <o:p> </o:p> Because of heavy dependence on leveraged buyout (buyin= g a company through significant amount of borrowed money) to raise money, a pri= vate equity fund and a buyout fund have almost become interchangeable in the <st= 1:country-region w:st=3D"on">US</st1:country-region> and <st1:place w:st=3D"on">Europe</st1:= place>. <o:p> </o:p> Unlike investment in stock or bond markets, returns on private equity are not linked to the performance of a market or index. The private equity industry works on 2:20 principle. Typically, General Partners (the management firm which has unlimited liability) are compensated with an annual management fee of 2 per cent of committed capital. Thus, a $10 billi= on fund can generate $200 million a year for a PE fund in management fees alon= e. In addition, the general partner is entitled to ‘carried interest,= 217; a performance fee paid to managers, based on the profits generated by the f= und. Typically, the general partner gets carried interest of 20 per cent of prof= its. No wonder, the key partners at some of the largest private equity firms have become billionaires. According to Forbes, the top 20 managers of pri= vate equity and hedge funds at Wall Street pocketed an average of $657 million in 2006. This compensation is 22,255 times the pay of an average <st1:place w:= st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:place> worker. <o:p> </o:p> Limited Partners (the investors, who have limited liability and are not involved with the day-to-day operations) receive inco= me, capital gains and tax benefits. Financing in private equity operations is in the form of both equity and debt. In a typical leveraged buyout deal, the private equity fund puts in just one-fourth and the remaining three-fourths= of the total capital is financed through debt. <o:p> </o:p> The Process<o:p></o:p> <o:p> </o:p> The buyout process starts by taking a public listed company completely private. The proponents of PE firms argue that private ownership frees companies from the short-term pressures of the stock market= s, and thereby enabling them to invest for the long term. <o:p> </o:p> But the main reason is somewhat else. Unlike privately owned companies, public-listed companies are required to disclose a number = of information about its operations to the shareholders, regulators and the general public. The disclosure of information may invite closer scrutiny and demands from diverse shareholders, public interest groups, environmentalists and trade unions. By going private, PE firms can bypass the responsibility = of complying with regulations (such as Sarbanes-Oxley Act in the <st1:place w:st=3D"on">= <st1:country-region w:st=3D"on">US</st1:country-region></st1:place>) and carry out its activit= ies free of oversight and public accountability. The exact operations of the acquired companies are not even revealed to the limited partners of the PE funds. So the lack of transparency is an essential part of PE business mode= l. <o:p> </o:p> Apart from providing capital, private equity funds also provide business expertise and usually assume complete management control of the companies in which they invest. PE managers micromanage the firms they = buy. Besides joining the board of the portfolio company, PE funds also have a fi= nal say over how the company is run. The buyout firms save on cash flow by cutt= ing cost and minimizing investment. They may fire workers and oversee change in= senior management if required. <o:p> </o:p> It is important to note that PE firms typically invest= in only those companies that generate higher cash flows rather than growth companies. The target company’s cash flow plays a key role in the decision since it determines the company’s ability to service debt including additional debt incurred as part of its restructuring. In many developed countries, PE firms have intentionally bought companies that have lower growth prospects but higher cash flows. <o:p> </o:p> The main intention of PE firms is to increase the valu= e of the companies through restructuring, generally over a three to five year ti= me span, and then exit through an initial public offering (IPO) by listing its shares in the stock market or sale to another private equity or strategic investor. <o:p> </o:p> In a nutshell, PE firms buy companies not to own and r= un them with a long-term perspective (as foreign direct investors such as Siem= ens or Vodaphone might do) but they are essentially buy-to-sell investors. <o:p> </o:p> Improving Operational Efficiency or Quick Flipping?= <o:p></o:p> <o:p> </o:p> Recent evidence suggests that PE funds are undertaking buyout deals with short-term investment horizons. Increasingly, many private equity funds are making quick profits through management fees and financial engineering rather than improving the operational efficiencies of acquired companies with a long-term perspective. To illustrate this point, take the = case of buyout of Hawkeye Holdings. Three weeks after PE firm Thomas H. Lee Part= ners agreed to buy Hawkeye Holdings in May 2006, the company filed registration papers with the US Securities and Exchange Commission to launch an initial public offering. Hence, no efforts were made by PE firm to restructure and polish the company, which is stated to be the raison d’etre of private equity industry. <o:p> </o:p> PE firms have a natural tendency to increase a portfol= io company’s indebtedness to pay themselves large dividends and thereby quickly recoup their initial investments. Firms are extracting record divid= ends within months of buying companies, often financed by loading them up with additional debt. It is not uncommon to find PE firms declaring a billion do= llar dividend. Take the case of Warner Music Group which was bought for $1.25 billion in 2003 by a group of PE firms consisting of Thomas H. Lee Partners, Bain Capital and Providence Equity. Within months of acquisition, Warner Mu= sic made dividends, advisory fees and other payments of $1.43 billion to PE own= ers. In other words, the company paid off all the equity originally committed by= the buyout group. The promises made by PE firms at the time of acquisition of Warner Music are yet to be materialized. On the contrary, the performance of Warner Music has been deteriorating with no improvement in revenues and profits. The company suffered a loss of $27 million in the first quarter of 2007. <o:p> </o:p> Another example is Celanese, a US-based chemical compa= ny, which was bought by the Blackstone Group for $3.8 billion in May 2004. In t= his deal, Blackstone had put in about $650 million in cash equity. However nine months later, Blackstone paid itself $500 million in dividends. Besides, Blackstone also cornered $45 million from Celanese as advisory fees. <o:p> </o:p> The Period of Boom<o:p></o:p> <o:p> </o:p> In 2007, the global PE market witnessed some of the biggest buyout deals ever.= The US-based energy company, Texas Utility, was acquired by KKR and TPG Capital= for $45 billion, while Blackstone took over the control of Equity Office Proper= ties (US) for $39 billion and announced its $26 billion purchase of the Hilton Hotels chain. In the month of July 2007 alone, private-equity buyouts total= ed $64 billion. <o:p> </o:p> This raises a moot question: why is th= e private equity business booming so much? The answer lies in the global financial </= span>market conditions which have been very conducive for PE industry since 2003, with = low interest rate regime, worldwide glut of capital, buoyant credit markets, and massive growth of structured credit products such as collateralized debt obligations. The low interest rate regime encouraged wealthy investors to l= ook out for more remunerative alternative investment options such as private equity. Big investors prefer to invest in a big PE fund rather than holding direct stakes in several companies. Pension funds find it convenient to inv= est in a PE fund rather than investing in a diversified portfolio of companies.= <o:p> </o:p> The Bust?<o:p= ></o:p> <o:p> </o:p> Following the eruption of sub-prime mortgage crisis in= the <st1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-regi= on></st1:place> in mid-2007 and the subsequent squeeze in the global credit markets, a slow= down in the pace of buyout deals by PE firms has been noticed. The turbulence in credit markets has negatively affected the global private equity industry w= hich largely banks on borrowings to acquire companies. Lenders are demanding hig= her interest rates and tighter conditions on buyout loans. <o:p> </o:p> Thus, the PE industry is facing a severe resource crun= ch. Several mega deals have been held up. Financing packages for the acquisitio= ns of Alliance Boots, Chrysler, First Data and Cadbury Schweppes have been postponed. It will be more difficult and more expensive for PE firms to bor= row money for buyouts. <o:p> </o:p> Spaces for Intervention<o:p></o:p> <o:p> </o:p> By and large, NGOs, citizens’ groups and corpora= te researchers have not given much attention to private equity issues. To a la= rge extent, the technicalities and complexities involved in the business of pri= vate equity explain this gap. <o:p> </o:p> If peoples’ movements are strong, alert and influential, PE industry could be brought under a strict regulatory framewo= rk. The PE industry could be forced to play by the same set of regulations as o= ther businesses. If banks, pension funds and other financial institutions are regulated, why should private equity be an exception? The demand for workers and communities stakeholders having a say in the buyout deals is not only desirable but feasible too. <o:p> </o:p> With the help of labor unions and other civil society actors, a concerted effort to educate and persuade public, workers, policymakers and media can bring necessary mechanisms to ensure greater regulatory oversight and public accountability of PE industry. <o:p> </o:p> However, the biggest obstac= les are political. Thanks to political patronage, global private equity industry operates free of regulatory oversight and public accountability. In the <st= 1:place w:st=3D"on"><st1:country-region w:st=3D"on">US</st1:country-region></st1:pl= ace>, for instance, private equity industry is politically well organized. Sensing trouble over tax and transparency issue, the US-based private equity firms = not only activated their own lobby groups but also formed alliances with other industries such as real estate, energy and venture capital in order put for= ward a united front to oppose proposed tax rate hike. <o:p> </o:p> What is amazing is that des= pite their sharp internal differences, the US-based PE firms joined hands to lau= nch Private Equity Council in February 2007 in order to collectively fight agai= nst moves for greater regulation. <o:p> </o:p> Is this strategy worth emulating by civil society actors? <o:p> </o:p> Source: Civil Society, February 2008<o:p></o:p> <o:p> </o:p> </div> </body> </html> ------=_NextPart_01C9EE7D.FB489350 Content-Location: file:///C:/8E9C44F3/TheDarkSideofPrivateEquityFunds_files/header.htm Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" <html xmlns:v=3D"urn:schemas-microsoft-com:vml" xmlns:o=3D"urn:schemas-microsoft-com:office:office" xmlns:w=3D"urn:schemas-microsoft-com:office:word" xmlns:st1=3D"urn:schemas-microsoft-com:office:smarttags" xmlns=3D"http://www.w3.org/TR/REC-html40"> <head> <meta http-equiv=3DContent-Type content=3D"text/html; charset=3Dus-ascii"> <meta name=3DProgId content=3DWord.Document> <meta name=3DGenerator content=3D"Microsoft Word 11"> <meta name=3DOriginator content=3D"Microsoft Word 11"> <link id=3DMain-File rel=3DMain-File href=3D"../TheDarkSideofPrivateEquityF= unds.htm"> <![if IE]> <base href=3D"file:///C:\8E9C44F3\TheDarkSideofPrivateEquityFunds_files\header.ht= m" id=3D"webarch_temp_base_tag"> <![endif]><o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"place" downloadurl=3D"http://www.5iantlavalamp.com/"/> <o:SmartTagType namespaceuri=3D"urn:schemas-microsoft-com:office:smarttags" name=3D"country-region" downloadurl=3D"http://www.5iantlavalamp.com/"/> </head> <body lang=3DEN-US> <div style=3D'mso-element:footnote-separator' id=3Dfs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1 width=3D"33%"> <![endif]> </div> <div style=3D'mso-element:footnote-continuation-separator' id=3Dfcs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1> <![endif]> </div> <div style=3D'mso-element:endnote-separator' id=3Des> <![if !supportFootnotes]> <hr align=3Dleft size=3D1 width=3D"33%"> <![endif]> </div> <div style=3D'mso-element:endnote-continuation-separator' id=3Decs> <![if !supportFootnotes]> <hr align=3Dleft size=3D1> <![endif]> </div> <div style=3D'mso-element:footer' id=3Def1> <div style=3D'mso-element:frame;mso-element-wrap:around;mso-element-anchor-= vertical: paragraph;mso-element-anchor-horizontal:margin;mso-element-left:right; mso-element-top:.05pt;mso-height-rule:exactly'> <table cellspacing=3D0 cellpadding=3D0 hspace=3D0 vspace=3D0 align=3Dright> <tr> <td valign=3Dtop align=3Dleft style=3D'padding-top:0in;padding-right:0in; padding-bottom:0in;padding-left:0in'> <p class=3DMsoFooter style=3D'mso-element:frame;mso-element-wrap:around; mso-element-anchor-vertical:paragraph;mso-element-anchor-horizontal:margi= n; mso-element-left:right;mso-element-top:.05pt;mso-height-rule:exactly'><!-= -[if supportFields]>PAGE= <![endif]--><o:p></o:p> </td> </tr> </table> </div> <o:p> </o:p> </div> <div style=3D'mso-element:footer' id=3Df1> <div style=3D'mso-element:frame;mso-element-wrap:around;mso-element-anchor-= vertical: paragraph;mso-element-anchor-horizontal:margin;mso-element-left:right; mso-element-top:.05pt;mso-height-rule:exactly'> <table cellspacing=3D0 cellpadding=3D0 hspace=3D0 vspace=3D0 align=3Dright> <tr> <td valign=3Dtop align=3Dleft style=3D'padding-top:0in;padding-right:0in; padding-bottom:0in;padding-left:0in'> <p class=3DMsoFooter style=3D'mso-element:frame;mso-element-wrap:around; mso-element-anchor-vertical:paragraph;mso-element-anchor-horizontal:margi= n; mso-element-left:right;mso-element-top:.05pt;mso-height-rule:exactly'><!-= -[if supportFields]>PAGE= <![endif]-->1<!-= -[if supportFields]></span= ><![endif]--><o:p></o:p> </td> </tr> </table> </div> <o:p> </o:p> </div> </body> </html> ------=_NextPart_01C9EE7D.FB489350 Content-Location: file:///C:/8E9C44F3/TheDarkSideofPrivateEquityFunds_files/filelist.xml Content-Transfer-Encoding: quoted-printable Content-Type: text/xml; charset="utf-8" <xml xmlns:o=3D"urn:schemas-microsoft-com:office:office"> <o:MainFile HRef=3D"../TheDarkSideofPrivateEquityFunds.htm"/> <o:File HRef=3D"header.htm"/> <o:File HRef=3D"filelist.xml"/> </xml> ------=_NextPart_01C9EE7D.FB489350--