Private equity – a threat to the well-being of capitalism

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Will Hutton was also writing in the Observer this weekend. I'm not a committed fan of Hutton's. But he's right about private equity: this is a real threat to the UK economy. I stress, I'm not talking about real venture capital. That's positive stuff, which I support. I'm worried about the asset stripping type: the Goldman Sachs and their likes variety. This will undermine accountability, harm all attempts at creating sustainable business and will put massive downward pressure on pay and conditions, especially for those already lowly paid. There's no other way that the UK banks who are financing these deals might prosper.

The response from the British Venture Capital Association in the same paper is ludicrous. They say that because these companies have a few owners that can be readily identified they are more accountable than public companies. This is the logic of shareholder capital gone mad: the assumption is clear since it implies the only people to whom a business is accountable is its shareholders.

That's not true. Companies have a wide range of stakeholders. In 1975 the Accounting Standards Committee (precursor of the many standard setters who have followed in their path in the UK) identified in a ground breaking report entitled 'The Corporate Report' (not available anywhere that I can find on the web) that the purposes of a company reporting comprehensively were to assess:

1. the performance of the entity;
2. its effectiveness in achieving stated objectives;
3. evaluating management performance, including on employment, investment and profit distribution;
4. the company's directors;
5. the economic stability of the entity;
6. the liquidity of the entity;
7. assessing the capacity of the entity to make future reallocations of its resources for either economic or social purposes or both;
8. estimating the future prospects of the entity;
9. assessing the performance of individual companies within a group;
10. evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity;
11. the compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified);
12. the entity's business and products;
13. comparative performance of the entity;
14. the value of the user's own or other user's present or prospective interests in or claims on the entity;
15. ascertaining the ownership and control of the entity.

This was radical stuff, much of which has never been achieved. It reflected the range of those with interest in reporting that they identified. 32 years on private equity certainly will mot be talking about categories 3, 4, 10, 11 and 15 because private company disclosure does not require this or the offshore world does not. Indeed, the use of offshore by private equity means that for most users much of this data will not be available. Private equity ignores these issues in the interests of transferring wealth to those able to shelter their income offshore, where it locates its activities to generate an additional unwarranted return.

But private equity of this sort is not only a threat to UK business, the environment, private sector employees, it also threatens our tax base and takes us back to the dark age of unaccountability: the era that gave rise to Ted Heath calling Lonrho the 'unacceptable face of capitalism'. Lonrho and Slater Walker were asset strippers. So is private equity of the sort described by Hutton. That's what makes private equity of this sort the unacceptable face of capitalism today.