Private Equity is attracting attention because of the nature and scale of its offers. To mimic the beer ad - “it’s all good!” But is it?
Many see private equity activity positively:
Nicholls said that while listed companies are burdened by heavy corporate governance, and shareholder, media and regulatory scrutiny, private equity companies are free from these constraints, providing them with a safe haven and a much calmer environment in which to do business. (Financial Planning, December-January 2007.)
Explicit in that statement is the view that corporate governance and regulatory requirements are bad for investors.
Let’s pause there. Modern Australian corporations law sits comfortably with the most dynamic and successful business market Australia has ever seen, with record levels of mergers, acquisitions, profits and tax revenues. It is also the safest market Australian investors have ever experienced. There are a number of reasons for that, but beefing up the law and the regulators after the horrors of the 80s, and after the lessons of Enron, HIH and others, has produced good dividends. Literally.
It is the “heavy corporate governance requirements, and the shareholder, media and regulatory scrutiny” that secures such good returns in a relatively low risk environment.
Private equity wants to be free of those constraints. That is so that they can take more risk free of scrutiny and regulation, so avoiding all the lessons we have learnt since the 80s; that scrutiny and regulation are better for the market than their absence. They want to be able to take higher risks for higher returns. With that comes higher danger.
Good corporate governance rests on five foundations - mandated constitutional provisions, behavioural restraints and processes under law, a strong active regulator, public reporting and accounting requirements, and the discipline of the market.
In big corporate deals private equity funds have targeted listed corporations that have lucrative government licenses - such as air routes and television channels.
If private equity funds broaden their market activity substantially they can affect our whole economy. If as a consequence the market as a whole is exposed to much higher risk, then so is Australia exposed to much higher risk.
By private equity funds replacing equity with debt in their targets, we go back to over-geared vulnerable business balance sheets. By requiring the servicing of higher levels of debt, tax revenues fall. By going private, investors are exposed to greater risk because of less regulation and limited scrutiny.
Unlike the public share register of a listed company it is not possible to identify the real investors or beneficial or substantial owners in private equity funds. Without public scrutiny it is not possible to determine their intentions or interests. Where capital is foreign it is not interested in Australia other than as an investment vehicle. In the case of sensitive or strategic industries such attitudes may not always be in Australia’s national interest.
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