Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Private equity: higher risk, higher return, higher danger

By Andrew Murray - posted Monday, 5 February 2007


The solution is not to inhibit private equity fund deals. In the main, private equity funds are legitimate market participants that add variety and choice to investment vehicles. But the higher risk they bring has to be managed.

Certainly foreign private equity fund deals must continue to be subject to review under the Foreign Acquisitions and Takeovers Act. But the solution for all private equity deals is to return to the prudential measures that are tried and true - scrutiny and regulation.

The solution is to require corporations in sensitive or strategic sectors, or businesses of economic significance - (the latter probably determined by high market capitalisation) - to have the same governance, accountability, and reporting obligations of listed companies, and be subject to the same intensity of regulation by ASIC. Otherwise, in the absence of that, Australia will pay.

Advertisement

There needs to be a shift in perception. Private equity is often far from private, as it includes public money from legions of small investors in investment and superannuation funds. That involvement of public money demands prudential market supervision.

Otherwise, Australia will pay in a variety of ways. It is not just a matter of people who choose to invest in private equity companies - they are at least are free to make their own investment decisions and to take the consequences, whether that is a substantial gain in the short term, or a disastrous and substantial loss.

Some of the biggest investors in private equity are the world’s largest pension funds, or those funds holding the superannuation of Australia’s millions of workers.

Private equity is accused of being interested in short term gains, not in long term advantage, whereas most investors in superannuation funds are looking to invest long-term and prudentially for their future retirement. They do not have short term profit in their sights, at high risk, but a steady and material gain over time.

Superannuation investors, both individuals and the large funds, could also be negatively impacted if leveraged private equity firms are unable to meet their debt obligations.

This would have a long term impact on those people relying on their superannuation fund for retirement, and would then impact on the taxpayer. If there was such a financial disaster, then people left without superannuation savings would be reliant on the taxpayer funded pension for their ongoing support. It is already clear that with the baby boomer generation coming up for retirement that such a situation would have a very negative impact on the Australian economy.

Advertisement

Companies which have embraced private equity firms see themselves as freed up to make money without pesky interference from regulators or from diligent shareholders. However, the checks and balances in place for public companies create an environment which protects investors and consumers without undue interference in the operation of the market.

The enthusiasm for private equity investment runs in the face of the corporate failures of the 1990’s like Enron and HIH. For all that private equity firms argue that public companies are hampered by over-regulation and shareholder scrutiny, the Parliamentary Joint Committee on Corporations and Financial Services found, in a recent report, that for public corporations the regulations strike the right balance between protecting the interests of investors without interfering too much in the operation of the market.

In the US an area of concern to regulators is the possibility that the close ties between private equity firms and investment banks could reduce the price paid to shareholders. This has also been identified by the Financial Services Authority in Britain as an area which it will be looking at, but it is not just a concern in the US and the UK. ASIC has flagged it as an area in which it is taking an interest in Australia, especially given the rapid increase in private equity investment in Australia in 2006.

  1. Pages:
  2. 1
  3. Page 2
  4. 3
  5. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

4 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Senator Andrew Murray is Taxation and Workplace Relations Spokesperson for the Australian Democrats and a Senator for Western Australia.

Other articles by this Author

All articles by Andrew Murray

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Andrew Murray
Article Tools
Comment 4 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy