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Last Updated: Thursday, 10 February 2005, 06:09 GMT
The rise of the new conglomerates
By Paul O'Keeffe
BBC Radio Current Affairs producer

Their influence on the global economy is increasing, three million of us are working for them in the UK alone, and they have hundreds of billions of pounds to spend in their battle for control of companies that are not already in their clutches.

Faceless men (illustrative photo)
Discreet and powerful, they stay out of the limelight

Welcome to the discreet - some say secretive - world of the private equity firm.

The term private equity will fly over most of our heads. But every day we enter the realm of these captains of industry.

Bought a new skirt at New Look or Debenhams? Both are owned by private equity firms. A holiday from Saga? A private equity firm owns that company too. Bought some car insurance from AA? Same again.

Jon Moulton is the boss at Alchemy in London, one of these private equity firms.

"We are the people who run the new conglomerates," he tells BBC Radio Four's In Business.

Twenty thousand people work at companies that are in Alchemy's portfolio, and Mr Moulton has real power, both over those companies' destiny and over their bosses.

"I can change a chief executive in five minutes," he says.

Creating value

Private equity firms invest in companies in the early stages of their life and older companies that may be in trouble or are undervalued by other investors.

Increasingly, they are buying companies that are listed on the stock market, such as New Look and Debenhams. Woolworths has just rejected an attempt by private equity firm Apax to buy it.

The aim for firms such as Blackstone, Alchemy and Apax is simply to sell the companies in their portfolio at a higher price than they bought.

The rewards - if the deals work out - can be staggering.

The top brass in the industry can pocket tens of millions of pounds. But Richard Sachar, chief executive of Almeida Capital--a company that monitors and advises this industry--warns against seeing private equity firms as just there to fill the pockets of a small group of individuals. The pension funds that invest in private equity firms win too, he says.

"Before everyone starts wondering if this industry is just set up to feed the wealth of a limited number of individuals; it does that as a result, ideally, of vast sums of money going to pension funds to benefit pension fund holders," Sachar explains.

Deserting the stock market

But just how accountable are private equity firms?

In contrast to publicly listed companies, private equity firms and the companies they own are shielded from the glare of attention.

High Street shoppers help bolster private equity firms' bottom line

Why? Because they are not listed on the stock market and do not have to disclose the quantity or depth of information that those companies must.

It is the attention given to their short-term misfortunes that will make public companies give up on the stock market to go private, industry experts say.

"Markets... tend to way over-react to very short-term news," Steve Schwarzman, one of the world's biggest dealmakers, tells Radio Four's In Business.

Mr Schwarzman is the head of the giant private equity firm Blackstone Group.

He thinks stock markets can be an unattractive place for a company to have its home.

Internal controls

But then, how much better are a company's fortunes in the hands of a private equity firm?

"We are better able to sort things out quickly, effectively," says Mr Moulton.

"We can break companies up without having to worry about all the public company paraphernalia of doing so."

The heads of private equity firms are in full control of the managers and chief executives who run the companies in their conglomerates, and they only have to answer to a small group of investors, typically big pension funds which look after our retirement money.

Not everybody is comfortable with private equity firms' ability to hide from the limelight.

Some Members of Parliament (MPs) have raised their voices about the accountability of private equity firms.

But Mr Schwarzman refutes notions of secrecy.

"The idea that this is one or two people in the dead of the night just couldn't be more wrong," he says.

The investors in his firm are themselves highly regulated and there is good internal controls, he says.

Giant warchest

With the rise of influence of the global economy, these arguments may yet intensify.

Private equity firms across the world are on track to raise up to $200bn of new investment this year, compared with $130bn last year, according to Almeida Capital.

Borrowing on that amount will give private equity firms a $600bn warchest with which to go on a buying spree and bring more of us into their world.

"In Business" on the world of private equity is presented by Peter Day on Radio 4. Scheduled broadcasts: 2030 on Thursday10 February and on at 2130 on Sunday 13 February.


SEE ALSO
Woolworths rejects Apax takeover
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