PRIVATE EQUITY COMPANIES
A comparatively recent entry onto the financial scene is the Private Equity Company (PEC) creating
much publicity with billions of pounds involved in their activities. The principles of a PEC are that
they purchase the shares of an existing company be they listed on the Stock Exchange or private. If
on the Stock Exchange (SE), that company being taken over by the PEC, will no longer be listed and
will not be required to adhere to the strict SE regulations. One reads of companies being “taken
private”. This means that a company will no longer be in the public arena and answerable publicly to
its shareholders. So it follows that the financial activities of a PEC are not accountable to public
scrutiny. And the public shareholders having previously had much information and indeed dividends
no longer have any involvement other than accounts information as filed at Companies House in line
with all Limited Companies.
There has been concern at the foothold that PEC’s are taking in the market place, so much so, that
there is a Select Committee Inquiry instituted to investigate at the way they are run. The amount of
monies raised to buy out companies to put them under the umbrella of a PEC will not be readily
available and the PEC will borrow the money required from financial institutions such as banks etc.
This means that the first call on the profits of a taken over company will be used to pay off the
interest. Because of the heavy charges it can be seen that having first call on the profits of the
company, there will be less to plough back into their operations.
The ultimate aim of a PEC is to purchase a company, take it out of public ownership and then return
to the market for a Stock Exchange listing. For example a PEC would buy existing shares at £5 each
and then subsequently sell them back to the general public and institutions at £10 each so making
substantial profits. Whilst in control of its newly purchased company, the PEC’s will examine the
various activities of their new acquisition and sell off relevant parts of it, which then obviously
reduces the initial purchase price and the subsequent loan and loan interest.
A complaint about PECs is that they would appear not to be interested in the ongoing activities of
the company they have purchased and are only interested in the long term gain when that company
is sold. So it can be said that there is no advantage to a company being absorbed into a PEC, but
such are the capital profits involved for all concerned, PECs make the headlines because of the
But this is not true because it is in the interest of the PEC to continue trading that acquired
company at the same rate as previous and effect economies of scale, making it leaner and more
profitable. There is naturally much concern in the market place that “economies of scale” means
staff reductions. But any company being either a PEC or otherwise when taking over another
company will, perforce, look at the costs so as to maximise their profit return.
And now Private Equity Companies are making inroads into the light entertainment and leisure
Blackstone is in the news over the Chinese investment this week. Recently they acquired Tussauds
from Dubai Int Capital, having already got Merlin Entertainment (Legoland, London Dungeon and
cooperating with Ladbrokes on a Blackpool super-casino development), so now have 50 sites and
c13,000 staff and a combined entertainment company worth £2bn. Last year Blackstone bought
6th June 2007
Brian Attwood - The Stage
Californian/London based GI Partners want to buy Park Resorts from ABN Amro which also owns
ABN Holiday Parks. GI used to own Yates's wine lodges and bought Orchid pubs from Punch
Taverns. Last year Legal and General Ventures bought South Lakeland Caravans in the NW for £100
million. Alchemy Partners paid £140 million for Parkdean Hols (beating Grainger Trust). Private
Equity, 3i and Graphite Capital (Cinque Port Resorts £130 million)are also involved in PECs.
The three most well known of PECs are The Carlyle Group, KKR (Kohlberg Kravis Roberts) and
Despite some adverse publicity, as above, PECs are now very much part of the financial scene, so
much so that insurance companies are now buying into them as they would for other shares in their
portfolio towards endowment and pension funds.
Not only are there substantial gains to be made by the PEC but professionals such as brokers,
solicitors and accountants are now setting up separate departments to deal with this new
Whilst there is always alarm at being taken over by persons who have no knowledge of the trade in
which they are entering, PECs are having the effect of companies looking at their own activities and
tightening up their operations to maximise their profits.
No one likes change for changes sake but the very existence of a PEC, with its financial resources to
mount a take over, focuses the mind of all publicly quoted companies. And unfortunately someone
somewhere will always be hurt.
There is however a lot of resentment towards private equity deals with trade unions in the vanguard
over the possible redundancies by a new management. There are also favourable tax treatments to
PECs not available to other companies taking over other companies in the normal course, and the
effective secrecy of not having to account publicly for their activities, which obviates possible
shareholder revolts. In addition because PECs are attracted to very large companies, those
companies are taken out of the Stock Exchange and it is further contended that the existence of
PECs is changing the face of capitalism. Because PECs are based on massive loans taken over, there
is a fear that if something should go wrong, then the ramifications throughout the business world
would be disastrous.
The memories concerning the problems which surrounded the dot com era are coming back to
haunt the financial institutions in extremis.
6th June 2007
Brian Attwood - The Stage