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25 Jun, 2007

Beware the “Brutal” Private Equity Funds, Unions Warn

Continuing its campaign to warn governments and workers about the growing power of private equity funds, the federation of international unions in the hotel, catering, food and farm sectors has issued a report seeking to expose the funds’ inner workings and get them placed under greater public scrutiny.

Produced in response to a growing number of requests from trade unions around the world and written in plain language, the report describes how the private equity funds buy companies, what they do after buying it and how their fees, charges and various takeover strategies are designed largely to benefit a small group of private individuals and investors.

Citing the upheavals and controversies at at least two travel & tourism companies — Gate Gourmet and Tokyu Tourist Corporation — the report declares, “What is best for the individual investor is not necessarily best for the individual company, its workers, the wider community or the economy as a whole.”

It adds, “By their very nature, private equity buyout firms cannot have a long-term perspective that recognises the rights and interests of union members. In their brutal calculations they cannot see a workplace as a place of employment, but only as a ‘bundle of assets’ to be manipulated and squeezed for as much cash as possible in the shortest time before they ‘dispose’ of the investment.”

The report is the second attempt this year by the Switzerland-based federation known by its French acronym IUF to alert the world to the global buying spree by private equity funds. In May, it launched a website [www.buyoutwatch.info] to promote transparency and accountability in the way the funds do business.

The latest report says, “In just five years, private equity funds have established themselves as major short-term owners of companies employing hundreds of thousands of IUF members around the world. In 2006 private equity funds spent over USD 725 billion buying out companies — an amount equivalent to buying the national economy of the Netherlands, or the economies of Argentina, Poland and South Africa combined — with billions of dollars to spare.

“Buyout funds today can potentially mobilise in excess of USD 2 trillion in purchasing power. This is equivalent to a private equity shopping spree with a basket deep and wide enough for 22 Unilevers, or 31 British American Tobacco (BATS), or 38 McDonald’s or 47 InBevs at their current market value.

“In just the past two years the size of individual buyouts has increased dramatically, with record buyouts exceeding USD 35 billion in 2006. The year 2007 is now touted as the year of the USD 50 billion or even a USD 100 billion buyout. This means that virtually no company in which our members work is immune from takeover by private equity funds.”

Accompanied by a glossary of “decoded” terminology that private equity funds use to drive lobbying efforts and force regulatory and tax-regime changes to promote their interests, the report lists how a “radical transformation of management priorities” follows a private equity buyout.

It says, “When a buyout fund takes control, the management’s focus is not on actual business operations – output of goods or provision of services – or even increasing operating margins. Instead, the exclusive concern of corporate management is to extract maximum cash out of the companies in the quickest amount of time regardless of the long-term impact on output, productivity and profitability.”

The report says that in order to respond to the challenge, trade unions will “need to develop creative organising strategies to reassert the public interest.” Exposing the funds’ modus operandi “is a necessary element of a trade union strategy for fighting back.”

It notes that the system of accountability, disclosure and reporting requirements faced by publicly held companies was designed to set certain limits on corporate power and defend the public interest.

But after a private equity buyout, “these restrictions disappear at a stroke. There are no shareholder meetings, because there is only one shareholder – the fund. There are no disclosure requirements, meaning regular information on the performance of the business – and its financial health – is not accessible to its employees or to the wider public affected by its activities.”

It adds, “Investment in private equity is by definition highly restricted, accessible only to very large institutional investors and extremely wealthy individuals. Information on public companies, by contrast, is universally accessible – even to non-shareholders.

The report says that, “Transparency is essential not only to shed light on the activities of the funds as a whole, but to permit public scrutiny of their financial operations at the level of the individual companies they buy and sell.”

“Understanding this evolution can help us to challenge and reverse these regulatory changes – and build public support by clearly exposing the role of private equity buyout funds in destroying social wealth.

“Workers — and society as a whole — cannot simply wait for the current cycle to run its course, as financial authorities and private analysts are increasingly predicting it soon will.”

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