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Last Updated: Tuesday, 20 June 2006, 23:00 GMT 00:00 UK
Why private equity firms matter
MONEY TALK
By Marek Gumienny
Managing Director of Candover private equity firm

Marek Gumienny
Marek Gumienny is a major private equity player
The recent spate of high profile approaches by private equity firms to quoted companies means that the private equity industry is firmly in the spotlight.

Since the start of the year, we have seen bid approaches for VNU, Kesa, TDC, Vodafone Japan, House of Fraser, HMV, ITV and Associated British Ports, to name just a few.

It is 25 years since private equity started to make its mark in Britain - an idea imported from the US. In that time, private equity has been instrumental in altering the way in which companies "do business".

Today our industry buys one in three companies sold - and the companies we own employ one in five people outside the public sector.

What we do is very simple. We see our role as empowering business leaders as they seek to make change.

We help them run their businesses more effectively and efficiently with both financial support and practical guidance.

Many companies recognise that the public markets no longer offer enough support to enable companies to take brave decisions without an instant pay-back

What private equity means for investors is correspondingly simple.

We offer them a capital market in parallel to publicly quoted companies.

We are just an alternative asset class to equities or bonds. And our investors are the same as those in the public markets - the same pension schemes and life funds investing the money on behalf of individual citizens.

Brave decisions

As individual citizens we have money invested in both the public markets and private equity through our pensions and other financial products.

So why the need for our approach? What private equity offers is a model for taking risk and getting rewards.

The public markets value most highly those businesses that promise and then deliver sustained growth and a high degree of certainty on dividend returns.

Private equity offers an ownership structure suited to companies that need risk capital to accelerate their growth organically or by acquisition, increase their returns or fund restructuring.

Many companies recognise that the public markets no longer offer enough support to enable companies to take brave decisions without an instant pay-back.

This is because the make-up of the institutional shareholder base has changed and along with it their attitudes.

The private equity firm is intimately involved with the development of strategy and changes of management

There has been a huge swing to an "absolute returns" style of investments - epitomised by US value funds and hedge funds.

This means that institutions hold shares for much shorter periods than was previously the norm. With shorter time horizons, the views they present to management teams and the demands they make of them naturally reflect that position.

Management liaison

Private equity, on the other hand achieves success by working extremely closely with the management teams they back.

Released from the treadmill of having to publicly report on everything to legions of investors they barely know, managers can radically re-focus and build their businesses based on a longer-term vision.

Of course, good corporate governance is still crucial.

Coral betting shop
Under private equity ownership, Gala bought Coral last year

That is why we have such a direct relationship with the companies invested in.

The private equity firm is intimately involved with the development of strategy and changes of management.

Because of the risk involved with the high levels of debt used to fund our acquisitions, we take a much closer interest in our investments than a traditional institutional shareholder might.

The rewards from our approach - for us and the management teams we back - are directly linked to the value that we create on behalf of those who have invested in our funds.

Criticism

Private equity, of course, has its critics.

According to them we buy companies on the cheap, strip the assets then sell them off quickly for a fast profit before the wheels fall off the wagon.

At the same time, we borrow to fund our acquisitions with unsustainable levels of debt and operate in a shadowy secret world, not giving out enough information about how we operate.

The private equity feeding frenzy has the potential to erode the value of UK pension saving
Justin Urquhart Stewart, Seven Investment Management

Let me give you an example that perhaps goes some way to showing this view as a myth - the story of Gala, the bingo to betting business.

Originally spun out of Bass in 1997, Gala has flourished since, growing organically and through acquisition and is currently on its fourth phase of private equity ownership.

Candover's interest started in early 2003 when we bought the business with Cinven.

Continued investments means that in October last year, Gala was able to buy Coral in a 2.2bn deal. A business sold to private equity for 250m is now valued at 4bn.

Deals such as Gala - which are being repeated throughout the US and Europe - show the depth of the private equity market today.

We believe we create value for our investors by buying and building businesses, not by stripping them down.

And as we have done so, we have kept all our investors fully informed.

We have to convince institutions to invest and then re-invest in our funds and we could not do that without complete transparency on our performance.

We have to prove with each fund raised and with each deal done that we are worth investing in.

The private equity industry has grown rapidly in the UK and continental Europe and will continue to grow at pace.

We need to get away from the simplistic debate that public is good and private is bad.

We need to recognise that both public and private have their strengths (and weaknesses) - and learn to recognise and appreciate those differences.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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