Buyout chiefs defend industry

Industry figures have come out in defence both of financial engineering and the range and diversity of the asset class saying it does not depend on leverage for returns.

Three leading industry figures have defended the merits of private equity against asset manager Fidelity Investments’ chief investment officer Sir Michael Gordon’s claims that the buyout boom was “a clumsy trick”.

Simon Walker:
quality buyout
firms survive

Gordon said in an article in UK newspaper Financial Times earlier this week the industry used leverage to manipulate returns, which exacerbated losses in a downturn.

Simon Walker, the chief executive of industry body the British Private Equity and Venture Capital Association, said in a letter to the paper: “Private equity has taken advantage of cheap debt over the last few years and plcs have sometimes neglected their shareholders by failing to do so. We are now entering a different stage in the cycle. Credit downturns have happened before. Leading companies such as Carlyle, Bain, Apax, KKR and Permira have survived them. There will be buy-outs that go bust, just as there will be plcs collapse.” He said even failed buyouts could leave behind repaired and improved companies.

Other executives from private equity houses with strong presences in parts of the industry which have traditionally used less leverage in deals, made the case that many private equity firms implement operational improvements to generate returns.

Dominique Senequier, chief executive of AXA Private Equity, part of the French insurance giant, wrote in a separate letter to the paper: “Private equity houses that deliver over the long term recognise that success depends on much more than financial engineering. We can point to a considerable number of examples where, as investors, we have combined business acumen and a network of contacts to help companies grow in ways that could not be achieved by financing alone –leveraged or otherwise.”

Bill Ford, chief executive of growth capital specialist General Atlantic, said in a third letter private equity was varied and segmented, and its demise was greatly exaggerated. He said his firm’s specific niche did not depend on leverage. “[Growth equity] is markedly different from driving operational improvements in mature businesses and obtaining returns from financial leverage,” he said.

Private equity has taken advantage of cheap debt over the last few years and plcs have sometimes neglected their shareholders by failing to do so.

Simon Walker

There has been a 65 percent slump in the volume of deals in the first quarter of this year, down from $179.8 billion the same period last year to $63.1 billion, according to data provider Dealogic. Much of the activity has been generated by larger mid-market buyout firms like 3i and Montagu Private Equity. Most mega-buyout firms, which used the highly liquid credit markets of 2006 and the first half of 2007 to carry out unprecedented mega deals, by contrast, have remained inactive.

The highest spenders of last year on bank fees Goldman Sachs Capital Partners and The Blackstone Group paid less than $10 million to banks in the first quarter.