Three years ago, The Economist ran a feature called ‘The Kings of Capitalism,’ written by the EVCA Symposium’s first keynote speaker Matthew Bishop. Because of the way private equity was investing – building companies, creating jobs, taking constructive risks and professionalising businesses – the piece painted private equity as the top dogs of the capitalist universe.
Things have changed dramatically since then – the article need a box to explain what private equity actually was. It was a time when the industry was just becoming mainstream and when few people had ever heard of it, let alone knew what it did. Speaking to one leading US fund manager at the time, Bishop asked how one would go about explaining private equity to the public. The response was that if there was to be a private equity movie, Stephen Schwarzmann would be played by Michael Douglas. Bishop argued this demonstrated how big private equity had become in New York, and how things have changed since Douglas started as Gordon Geco in the 1980s classic Wall Street.
He later spoke to Schwarzmann himself, describing him as less hard-edged as Geco – which is nice – and recalling his peculiar technique of leaving the room every time Bishop asked a question, only to return five minutes later with the answer. When not somewhere else, Schwarzmann told Bishop that the barbarians at the gate image was no longer appropriate, although whether Hollywood takes that same view remains to be seen as there is in fact a private equity movie afoot, and Schwarzmann is rumoured to be the template for one of the protagonists – the US$7.5bn Schwarzmann earns however is wealth beyond even Geco’s dreams.
As a journalist, this issue of image was key to his talk. In the midst of the media and union attacks on private equity over the last year, he wrote a sequel to The Kings of Capitalism called The Uneasy Crown, which asked whether private equity can remain as the driving force of the world economy in the face of both media and government attention.
In the US he argued private equity has become the subject of the politics of envy – “You are just too successful” – and in Britain he recalled a chat with one senior buyouts figure who described the debate in the UK as “fundamentally deranged.” The trade unions are doing a particularly damaging job, taking the front foot in bringing the industry to the attention to a wider industry by highlighting and misrepresenting how it works and exaggerating its flaws. Gordon Brown, the UK’s prime minister in waiting, has already made soothing noises to the trade unions, speaking of justice and equality in taxation.
Bishop also raised the spectre of falling returns as fund sizes increase, something which hedge funds have fallen victim to in the past. Recalling the 1980s he said that, just like know, the bigger funds seem to be outperforming the rest – “but by the time of the reckoning in the early 1990s, the bigger funds were actually shown to have performed worse.”
The overarching message was of paradigm change: “The industry has enjoyed a decade where it has escaped the general trend towards transparency that has affected almost every other financial market. The pressure to publish performance will grow.” The question, he, said, was can private equity avoid falling victim to short-termism if it is forced to disclose the value of its portfolio companies.
Bishop called on the industry to sell itself better: produce a top 10 list of success stories to counter the likes of the AA and Bird’s Eye used by the trade unions. It should perform more philanthropy, one area where it lags behind the hedge fund community. Also, the industry needs to take the lead in creating transparency rules sufficient to satisfy public demands.