Private Equity - Angels or Demons?
Thursday, March 22, 2007
by
Derek Ellery
The debate over whether private equity is a good or a bad thing has been raging in the press. We use the phrase “business angels” to describe investors putting small amounts of cash into new ventures which are hoping for rapid growth and aiming to generate high returns for investors. That name indicates that we believe investment of this type to be a good thing and yet high value private equity deals and those who work in that market sector are increasingly coming under attack.
This seems unfair given that the objects of the so-called “business angels” and the large VCs such as Permira are in fact the same. They invest in businesses capable of producing higher than average rates of return and help those businesses achieve maximum profitability and value for their shareholders in order to provide a return for their own investors. The difference between the small-scale business angels and the large-scale VCs is arguably only one of perception.
One of the VC industries most vocal critics has been the GMB Union which has mounted a campaign against the large VCs in particular, Damon Buffini of Permira accusing them of being asset strippers and tax dodgers, an accusation which clearly shows a failure to understand how the private equity business operates.
In simple terms VCs raise the cash they invest from pension funds and other institutional investors, they are charged with investing this for a period, usually ten years and must then return it together with an appropriate slice of the profits. The more money the VCs make, the more cash their investors get back and given that their investors are mainly pension funds this benefits all of us. Of course VCs also take a percentage of the returns they generate but many businesses operate on that model and the fact that big deals generate big fees for VCs should not come as a surprise gien the excellent returns they provide to their investors.
VCs are accused of taking a cavalier attitude to people’s jobs and of being in business to make a quick buck with no thought for the long term future of the companies they invest in. In fact VCs bring a lot of knowledge and talent to their investee companies. In the age of the global economy, unless a business is profitable and sustainable, job losses will inevitably follow and equally job security can only be achieved by producing a healthy balance sheet. VCs use their resources and talents to turn companies into profitable, saleable commodities within the lifetime of their fund and in the process produce not only excellent returns for their investors, but generate revenue for financial and professional services, firms and employment for over 3,000,000 people. As such they should be seen as making a positive contribution to UK plc.
Much has also been made of the fact that VCs structure their deals with a maximum of debt to ensure that the investee companies pay as little tax as possible. As any professional adviser can tell you, every deal is structured to ensure that the minimum tax is paid and in that VC companies are no different to anyone else. Tax legislation applies to all UK companies equally. If the Chancellor wants to change the way that VC deals are structured he can change the law and market practice will follow, until then criticising VCs for operating entirely within the law seems unduly harsh.
The growth of the private equity industry has been good news for companies both large and small seeking funding and has generated substantial benefits for the UK in terms of employment and financial performance – undoubtedly not all VCs are angels but certainly the current demonisation of the VC industry is far from a positive step.
The information contained in this article is given for general information only, reflects the current law on the date of this article, and does not constitute legal advice on any specific matter