The ruthless operations of private equity firms, with Sainsbury’s now a prime target for a takeover, is a timely opportunity to organise workers and consumers in campaigns that raise the whole nature of ownership and control of enterprises. Or so you would have thought. Instead, the GMB union wants New Labour to rein in the activities of venture capitalists – by closing an alleged tax loophole! Private equity funds buy out publicly-quoted companies and then saddle them with vast amounts of debt used in the takeover. Asset-stripping and job losses usually follow before the company is returned to the stock market at a considerable profit. Analysts estimate that the consortium which is circling Sainsbury's would need to raise only £3 billion of equity to buy the supermarket chain that is valued at £9.5 billion by the stock market. The rest they would borrow from a mixture of banks and hedge funds. Companies owned by venture capitalists now employ 3 million people in Britain. The story of what happened to the AA breakdown service is typical. It was taken over in 2004 and loaded with debts of £1.9 billion, the equivalent of six years of subscription income from AA members. This debt is backed up by virtually no assets, since nearly all the buildings and fleet used by AA are leased. The new owners sacked 4,000 of the 10,000 staff, saving £100m per annum on resources devoted to dealing with 4 million breakdowns per year. Services to AA customers then declined because there are fewer patrol staff to deal with the same volume of breakdowns. AA will also lose the Volkswagen contract to its rival, the RAC, from April.But profits at AA have risen to £175 million, of which more than half is used to pay interest on the £1.9 billion loans, on which tax relief is claimed.
Thus, says the GMB in a letter to MPs, the taxpayer is subsidising the activities of the venture capitalists. The union’s letter reveals a touching faith in “ordinary” capitalism as opposed to the cowboy variety now stalking the land. “GMB consider that the private status of the venture capitalists is an abuse of company law and abuse of the privilege of limited liability status,” the union argues. Tax relief, the letter adds, “costs the Exchequer hundreds of millions per annum, while giving debt unfair tax advantages over equity”. This transfer from taxpayers is now leading to the “destruction of household name companies by venture capitalists”, MPs are advised. They are asked to impress upon Gordon Brown, the Chancellor and next New Labour Prime Minister, the need to do something about it. What a complete waste of time and a disservice to its membership the GMB campaign is! Firstly, stockmarket quoted corporations sack workers and depress conditions just as much as private equity firms do. The only substantial difference is that limited liability companies are obliged to make their plans public. Secondly, New Labour is the most business-friendly government around. Tax concessions on interest payments do not exist by accident but by design. New Labour has no intention of, for example, blocking the spate of mergers and acquisitions of firms (and football clubs) located in Britain because these activities are seen as signs of the virile, globalised, competitive nature of the economy. The economy is not what it seems, however. The resurgence of private-equity, casino capitalism is a reflection of a system awash with more credit and debt than real value. Even the Financial Services Authority has warned that the crash of a major private-equity enterprise is inevitable because of the debt mountains involved.
Paul Feldman, communications editor