Friday, May 11, 2007

Private equity vultures

It really doesn’t matter to the investors what commodity a company produces, just so long as there’s a profit to be made. These days the big money is generating profits from a new kind of commodity – the companies themselves. Japanese companies producing kimonos and rural wireless telecoms operators in the United States are the latest in the sights of private equity capital following the buy-out of Boots, the high street chemist chain. Private equity funds see companies with growth potential - like Boots, the AA, and Sainsbury’s - as raw materials which can be bought in, processed on a production line which always means intensifying the rate of exploitation of the employees, and sold on at a profit. And the profits made in 2006 by 3i, the largest publicly traded European firm in the private equity sector were pretty impressive. The total return on shareholder funds rose to 26.8% from 22.5% a year earlier. The spare money available for investment through private equity deals comes from profits made by companies making goods like cars and computers and services like call centres, which isn’t reinvested because the rate of profit to be made has declined as the result of competition in those sectors. And the private equity production line ratchets up the process by drawing in huge additional funds in the form of debt to pension funds.

In a bizarre turn of events, the GMB trade union has leapt to the defence – not of their members, but of the less profitable companies still publicly quoted on the stock exchange and so stuck in the sector of the economy where corporate law is stronger and accounts have to be made available for public inspection. In its submission to the Treasury select committee investigating the impact of the private equity industry, the GMB says that regulation was necessary to create a level playing field with other forms of business ownership. The practice of private equity firms loading companies with debt made them more vulnerable to shocks in the financial system, it said. As the Bank of England has since raised interest rates to the highest level amongst the rich G7 countries, the shocks are clearly in the offing. As with all things profitable, the market is attracting the competition and the vultures are finding it increasingly difficult to locate tasty victims. A similar process in the 1990s fuelled the dotcom feeding frenzy which crashed spectacularly - just as this one will. No amount of regulation can halt this process of capitalism devouring itself, and with it the futures of millions of workers. Stronger action is required, in the shape of a comprehensive social transformation, replacing the anarchy of capitalism with democratic control and ownership to create a not-for-profit economy.

Gerry Gold, economics editor

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