June 12, 2008
When it comes to private equity it seems that there is an ill wind blowing right through Europe. The credit boom, and now the credit crunch, have brought the activities of private equity firms under ever closer public scrutiny.
Writing in this month’s Cicero briefer, the former Danish Prime Minister and now MEP, Poul Nyrup Rasmussen, argues:
“Long before the financial crisis we were warned about the systemic risks and excessive debt of hedge and private equity funds. Today’s financial crisis may not have been caused by hedge and private equity funds—but the crisis revealed the huge interdependence of all the players in the financial market and showed the high vulnerability of companies with heavy debts due to leveraged buy-outs.”
Given that Rasmussen’s concerns stem from the experience of private equity in his home country, it is perhaps curious that this ill wind should have blown with greater force in Denmark than anywhere else in recent years.
Private equity gets a lot of bad press in Denmark, including—predictably—from the trade unions, even though they are themselves major investors in private equity in their role as pension fund trustees. Faced with hostile public debate, the country is embarking on a path towards reform—one which saw the Danes pass what has been referred to as “the world’s toughest law to curb the use of excess debt in leveraged buy-outs” in 2007. And only last week, the Danes were at it again.
This time, the ruling centre-right coalition is making further overtures towards regulating private equity. In an announcement by the Ministry of Economic and Business Affairs, Bendt Bendsen argued that there was a need to place greater focus on the activities of PE funds and hedge funds, and signalled that the Government has invited the political parties to discuss a Danish proposal regarding EU and international legislation for both. It is perhaps the clearest sign yet of the strong feelings in Denmark that even a free-market coalition feels compelled to take action.
Why Denmark should be reacting against private equity in this manner is not entirely clear. After all, other countries in Europe—notably the UK, Germany and Sweden—have seen much greater levels of private equity activity in recent years. And in all those countries, the governments have so far resisted such far-reaching reforms. While there have been high profile cases involving Danish companies, Denmark’s history with private equity is not in itself particularly remarkable. The market was relatively small during the 1990s—covering the period from 1993 to 1999, when Rasmussen was Prime Minister. This means that the data on the sector’s impact on the wider economy is limited before 2000. Furthermore, considering what assessments have been made by the Danish government since 2000 should put private equity in a more positive light.
In a report commissioned by the Danish government, the findings of which were published back in November 2006 by the Ministry for Economic and Business Affairs, the outcomes for Denmark’s economy seemed largely positive. At the time when the report was compiled, there were about 80 Danish companies owned by private equity employing about 80,000 people. This was equivalent to 4 per cent of private employment. Based on that analysis, those companies owned by private equity capital experienced on average:
- A higher growth in the number of employees (both part- and full-time) after the takeover than compared to the period before takeover. Calculations suggest that the annual growth in employment increased from 1.1 per cent to 1.7 per cent measured over a period of four years before and after the takeover;
- The increase in employment in the acquired companies is also higher compared to a reference group consisting of comparable companies. Employment growth is found to be 1 per cent higher in PE-owned companies;
- The companies undergo a significant added value in performance in the period when it owned by the funds;
- The portfolio companies also experience increases in turnover. Before acquisition, growth was about 0.5 per cent, while the subsequent turnover grows at 3.6 per cent per year over a period of four years; and,
- Companies also operate more efficiently, which the report suggests could be related to the benefits of active participation by PE fund managers in their portfolio companies, and greater incentivisation of the company management to become results-orientated.
Rather than undermining the concept of a socially-orientated market economy, private equity has undoubtedly played a role in helping to promote Denmark’s cherished position of having a flexible and competitive economy, with an emphasis on the concept of ‘flexicurity’, which stresses the benefits of a dynamic labour market.
Nonetheless, when set alongside all the fears of excessive debt and asset stripping, these positive arguments seem to be lost on many people—particularly when those calling for regulation have, to date, been much better organised and more vociferous in making their concerns publicly known. In Denmark, as in other countries, the private equity sector has been slow to communicate its activities. With the Danish private equity trade body, the DVCA, set to announce a new industry code, perhaps that ‘communications gap’ will start to change. However, it will no doubt take many years to change public perceptions about the industry. By which time, the appetite amongst public policy makers in Denmark, and indeed across the European Union, for supporting any kind of self-regulation could well be long gone.Author : cicero