Unions target private equity companies in campaign against asset stripping

The growing influence of private equity companies has been strongly attacked by trade unions concerned that debt-financed investment is being used to avoid socially responsible corporate behaviour. Permira, one of Europe’s largest private equity firms, has taken the unprecedented step of meeting the GMB general trade union to discuss its concerns. However, this is unlikely to end calls for reform and regulation of the industry.

In recent times, trade union criticism concerning the power of private equity companies and their role in initiating redundancies has hit the headlines. In particular, Permira, Europe’s largest private equity firm, is one of several companies that have been targeted by the GMB general trade union.

Trade union campaign

GMB has protested over redundancies at several companies which have been bought by Permira, including the AA and Birds Eye. It has also protested against the 3i private equity group over its potential GBP 800 million (€1,180,000 as at 23 March 2007) sale of National Car Parks (NCP), the UK’s largest operator of car parks. GMB is lobbying hard for industry-wide reform including the abolition of tax relief on interest, which would be a serious blow to an industry that relies heavily on debt to finance acquisitions. The trade union has written to members of parliament (MPs), who are affiliated to the union, asking them to support a parliamentary motion branding Permira an ‘asset stripper’.

Brendan Barber, General Secretary of the Trades Union Congress (TUC) has also criticised the private equity industry, accusing some companies of being ‘amoral asset strippers’ and warning pension fund trustees to reconsider before investing in private equity schemes. He has promised to urge ministers to regulate an industry that is ‘pretty much allowed to operate with impunity’.

Furthermore, Mr Barber stated:

In recent weeks we have seen a growing interest in the part played in our economy by the private equity companies. Almost three million people are already employed by companies owned by private equity. Other major companies are now being circled and weighed up as possible targets. Sainsbury’s are high on the list. Thousands of workers look over their shoulders fearful of the future, uncertain what such takeovers might mean.

He challenged the private equity industry to engage in serious dialogue with the trade union movement. As a starting point, he proposed three challenges for private equity companies:

• to say what they stand for and whether they accept any responsibilities to their workforce or the wider community;

• to open the industry to greater transparency and disclosure, particularly of the rewards paid to, and the tax paid by, top private equity executives;

• to establish whether private equity can establish long-term sustainability and not just fuel a short-term, high risk bubble waiting to burst.

Permira’s managing partner, Damon Buffini, has attempted to quell the trade union campaign by requesting a meeting with the GMB General Secretary, Paul Kenny. This unprecedented move by Mr Buffini to engage personally with representatives of one of the country’s largest trade unions reflects an increasingly heated political debate about the industry’s growing corporate power. This is likely to be followed by a similar meeting between 3i and GMB.

Views of business community

Richard Lambert, Director General of the Confederation of British Industry (CBI), has argued that the onus is on the private equity industry to address concerns about the impact of its growing corporate power and that city companies must act to defuse mounting pressure concerning private equity or face the regulatory consequences (Financial Times, 15 February, 2007). Mr Lambert believes that recent dramatic increases in the scale of private equity deals meant that companies could no longer operate ‘well below the radar screen of public interest’ and that they should be playing a more visible and leading role in promoting corporate social responsibility.

This lack of openness has been criticised by other business leaders. Paul Myners, former chair of Marks and Spencer (M&S), noted that ‘we are seeing public companies go private and they go from being transparent and accountable to a dark box’ (Financial Times, 21 February 2007).

Commentary

Private equity now owns businesses employing close to one in six UK private sector workers and millions of pensions are currently invested in private equity funds. At present, the UK private equity market is the second largest in the world. The industry is coming under critical scrutiny with trade union concerns being supported by many economic commentators. This call for regulation of the industry will set the tone for debate in less mature markets across Europe such as Germany, France and Italy. On 16 March 2007, trade unions from the more advanced economies met in Paris to discuss private equity, marking the start of an international campaign to regulate private equity and hedge fund investment.

Helen Newell, IRRU, University of Warwick