[sbinews] Private Equity dangerously affecting Pension Funds

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Wed, 24 Dec 2003 13:06:35 +0500

Private equity: A notoriously secretive industry 

[ WEDNESDAY, DECEMBER 24, 2003 01:37:07 AM ] 
A few years ago, the financial pages were full of stories about companies 
buying one another. They still are, even though big intra-industry mergers are 
currently rare. 

Today's purchasers have half-familiar names like Blackstone, Carlyle or 
Newbridge: all private-equity firms, which buy businesses, both new and mature, 
with a view to sprucing them up and eventually selling them again. This week, 
for instance, Blackstone agreed to pay $3.8bn for Celanese, a German chemicals 
firm. The deal is the biggest involving a listed German company withdrawing 
from the stock exchange and going private. 

Since 1980, estimates Venture Economics, a research firm, more than $1 trillion 
has been poured into private-equity funds. Once the industry was clubby and 
opaque, the preserve of rich families and private endowments. To some it looks 
sinister, especially when private-equity firms have former politicians on their 
boards, presumably for their connections. 

In any case, these firms are facing growing pressure to be more open, and not 
just from conspiracy theorists. The main reason for this is the private-equity 
industry's own success. As it has grown, it has attracted a broader range of 
institutional investors, notably big public pension funds, lured by the 
prospect of decent profits not correlated with volatile stockmarket returns. 
Venture Economics reckons that pension-fund money accounts for two-thirds of 
current inflows. These institutions are themselves under growing pressure to 
reveal more information, and they need to know what their private-equity stakes 
are worth. 

When the tech bubble burst, pension funds were left with worthless stakes in 
private-equity deals that had gone sour, on top of the damage done by tumbling 
stockmarkets. Trade unions and other groups of employees have since been 
calling for more information from pension-fund managers about how workers' 
money is faring. Those representing public employees (and inquisitive 
journalists) have been helped by state laws on the freedom of information. 
 A second reason for more openness is so far theoretical rather than real: the 
possibility of regulatory action. Already, hedge funds, also fast-growing and 
largely unregulated, have caught the attention of the Securities and Exchange 
Commission (SEC), which released proposed rules for such funds in September. So 
far the SEC has stayed out of private equity. But private-equity firms receive 
more public pension money than hedge funds do. Arguably, they are also more 
secretive, because hedge funds at least buy publicly traded securities (if in 
complicated ways). 

So some in the private-equity business want to pre-empt rather than resist 
calls for more transparency. This month the Private Equity Industry Guidelines 
Group, a collection of big investors and private-equity funds, unveiled 
guidelines intended to help standardise the valuation of investments in 
non-listed companies. Currently, methods are not clear and vary between firms. 
Pension-fund investors complain that these can lead to huge differences in 
different private-equity shops' valuations of similar stakes in the same 

The hope is that guidelines will make private equity more attractive to 
investors as well as staving off the possibility of external oversight. “With 
all the corporate fiascos of recent years, the regulatory climate has changed,” 
says one senior partner at a large buy-out firm, “No one wants the SEC pounding 
at the door.” 

Outside the US , the private-equity industry is less developed. There is also 
far less pressure from investors for greater openness. Curiously, however, 
Europe has had detailed valuation guidelines for years. These are still a work 
in progress — in Britain , an industry group is formulating the latest version 
— but Europe is nevertheless farther ahead. 

Aside from the self-serving or understandable reluctance of private-equity 
firms to reveal more, there are also genuine conceptual difficulties in doing 
so. Ultimately, the only measure of a private-equity stake's value is what it 
fetches when it is sold. But a sale might be years away. Interim valuations, 
particularly in start-up companies, whose worth, if any, lies far in the 
future, are difficult. Fund managers' judgement may be the best guide. But fund 
managers often have an obvious incentive to err on the optimistic side. Even if 
they do not, different managers are likely to value the same prospect 


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