LONDON (Reuters) – Private equity groups are encouraged to take “undue risks” by high rewards, the co-founder and senior managing partner of private equity group Apax Partners Adrian Beecroft said on Wednesday.
“Where our model goes wrong is the carried interest system rewards us enormously for taking undue risks — we invest 1 or 2 percent into the funds and we make 20 percent of the gains. So it’s not balanced and therefore if people will give us more debt than we ought to take, we’ll take it,” said Beecroft.
The carried interest system is a performance payment linked to annual profits, designed to motivate fund partners who have little or no investment in the fund.
Private equity groups have been frequently criticised for acquiring companies, loading them with high levels of debt only to float or sell them on in a couple of years at a vast profit.
Speaking at the launch of a report on company stewardship by think tank Tomorrow’s Company, Beecroft defended the reputation of private equity, saying it is a long-term investor interested in growing company earnings.
He added that private equity can align with companies’ management and give them greater ownership than their public counterparts.
Apax Partners is one of the world’s largest private equity groups, usually investing in companies valued between $1-5 billion. Its investments include fashion brand Tommy Hilfiger and business to business publisher Incisive Media.
Beecroft criticised investors and companies alike for taking too short-term an approach that has hastened the credit crisis.
“The key to the whole thing to me seems to be personal motivations. Everybody in the system does what is in their own best interests — and the secret to good stewardship is to get everybody’s longer term interests aligned with the longer term interests of the company,” he said.
By Simon Meads
(Editing by Elaine Hardcastle)