Page 145 - (DK) The Business Book

MAKING MONEY WORK 143

are in the same position. Only the They were investigated over a ten-
private-equity shareholders are year period—the six years leading
protected—by limited liability. up to the buy out, and the four
When publicly traded soccer years after it. The researchers found
team Manchester United was that in the year following the buy
purchased by US businessman out, 59 percent of the private-equity There is a simple way of
Malcolm Glazer and his family in owned businesses cut their staffing avoiding excess risk taking
2005, the transaction was levels, compared with 32 percent in by the managers of our
effectively a private-equity deal. the control group. In the following financial institutions. It is
The Glazers followed standard years, private-equity ownership to make it a crime.
practice, buying the publicly-listed was associated with falling average Paul Collier
company for $ 1.3 billion, then put wage levels among staff. In the UK economist (1949–)
the debts onto the balance sheet of short term employees appear to
the new Manchester United Ltd. lose out—and in the medium to
Private-equity owners suggest that long term their chances of losing
debt is an effective means of forcing their jobs are higher due to the
employees to work efficiently to greater level of debt of the
make a profit and meet interest companies they work for.
payments. More plausibly, though, company Blackstone Group earns
it is a way of transferring risk from Private-equity iniquity $130 million a year. He is closely
the private-equity owner to a limited Not everyone loses out under followed by the bosses of Carlyle
liability subsidiary. If Manchester private equity. In 2003 the British Group, Apollo Global, and KKR—
United Ltd. were to enter financial retailer Debenhams was purchased who each earn in excess of $100
trouble, the liability of the Glazers by three private-equity companies. million a year. Remarkably, all these
would be minimal due to the The businesses paid themselves bosses enjoy favorable tax treatment
protection of “limited liability,” a dividend of $1.9 (£1.2) billion in both the US and the UK. This
which limits the owners’ liability to before floating the publicly traded became an important issue in the
the value of their investment, not Debenhams onto the stock market 2012 US presidential election, when
the total debts of the business. in 2006—laden with debt. Years Republican candidate Mitt Romney
Research published in 2013 later, in its 2012 annual accounts, (a former private-equity boss) had
compared the performance of 105 the financial strain still showed. to admit that his income tax rate, at
companies purchased through The degree of “gearing” (debt as a 14 percent, was lower than that of
private equity and 105 “control” percentage of capital employed in average, working Americans.
companies in the same industries. the business) at Debenhams was a
high 51.5 percent, and its liquidity Executives on the hot seat
(as measured by the “acid test In the world of public limited
ratio,” which determines whether a companies and corporations, the
company has enough short-term CEO might be in the riskiest
assets to cover its immediate position of all. They may have the
We have corporate liabilities) was a very weak 0.175. most to gain from their business’s
CEOs who raise their pay Yet for the private-equity owners, success, but also the most to lose
20 percent or more in years the deal was highly profitable— from its failure. These risks may be
when they lay off thousands they made $1.9 (£1.2) billion very partly financial, but even more they
of people. It’s obscene. quickly and still retained shares in are reputational. Richard Fuld, chief
Charles Handy Debenhams (a stake that was sold executive of Lehman Brothers at
in the years that followed). Their the time of its 2008 bankruptcy,
UK management expert (1932–)
overall profits exceeded 200 percent. went from being an award-winning
For the bosses of private-equity CEO to a nominee for a range of
companies, the rewards can also be “worst ever...” awards. From being a
impressive. Bernard Schwarzman of director of the Federal Reserve Bank
US private-equity investment of New York, he became a pariah. ❯❯