Beyond transparency

David Rubenstein, co-founder and managing director of The Carlyle Group, has long been one of private equity's most vocal and eloquent advocates. So when he suggested this month that the recent initiatives to improve transparency in the industry may never appease the critics, it was an opinion worth taking into account.

Rubenstein warned the industry that greater transparency would, in itself, never be enough to dispel the unease that people in or around a target company would feel at the time of a buyout. Many of these objections were rooted in a fear of change, he said: ?Even if every private equity firm agrees to disclose every single thing about everything we do, that isn't going to dissipate all the objections because they're fueled by the fear that change will occur, and this brings doubt and uncertainty.?

Rubenstein was speaking in an exclusive interview with PrivateEquityOnline, a sister publication of PEI Manager, to mark his victory in the ?Private Equity Personality of the Year? category of the website's annual awards. The recognition was bestowed for his regular contributions to the private equity debate both in the media and at industry conferences.

His comments come as the global industry comes under increasing pressure from trade unions, politicians and the media to operate in a more transparent manner and disclose more information about its own finances and those of its portfolio companies. The controversy has perhaps raged most fiercely in the UK, sparked by a recent spat between the GMB trade union and buyout firm Permira over job cuts at the latter's portfolio company AA, a vehicle-breakdown service. This has since escalated into a broader debate about the dangers of the private equity ownership model.

The industry's response, led by UK trade body The British Private Equity and Venture Capital Association, was to set up a working party on transparency, led by City grandee Sir David Walker and also including a number of senior figures from within the industry. This working party is currently drawing up a set of guidelines on greater transparency and disclosure, which members of the BVCA will be compelled to follow.

However, Rubenstein's comments reveal that he is not convinced this will be enough make the problem go away, particularly when there are job losses and cost cutting to contend with.

Nonetheless, he does remain a firm believer that the industry needs to get better at explaining itself. ?My own view is that private equity has made companies more efficient, but the industry has to do a better job of explaining what it does to make this happen. We need to explain why tax revenues and employment numbers go up, rather than just bragging about rates of return and multiples on investment.?

In his view, big buyout firms ? like Carlyle ? now need to operate more like public companies because for all intents and purposes they are public. They buy public companies, they operate on a large scale, and they use the public markets as an exit route. So they need to expect the same disclosure demands, he believes.

One of Rubenstein's more radical recent ideas, which he reiterated in our interview, is that the industry could benefit from a rebranding exercise. Just as ?bootstrap deals? and ?leveraged buyouts? have become outdated terminology, he believes that ?private equity? may also be starting to acquire some negative connotations. Perhaps it is time for a new term, he argues. ?Private equity seems to have become a bad phrase? So maybe it's time to change the phrase to reflect what we really do. My suggestion is that we call this ?change equity? because that's really what we're trying to do ? whether in a public or private setting.?

But despite his misgivings about the current perception of the industry, and his apparent scepticism of the methods used to address this so far, Rubenstein remains extremely positive about the industry's long-term prospects. He accepts that returns are likely to come down in absolute terms, but believes that they will continue to outperform the public markets, albeit perhaps by a smaller margin.

Rubenstein has never been afraid to speak out on the industry's behalf. At a recent industry conference, he defended private equity against comparisons with the tech bubble of the early part of the decade, suggesting that the industry's success was based on much more solid foundations.

Dutch government summons fund managers
Alternative asset managers including CVC Capital Partners and Cerberus have been summoned to the parliament in the Netherlands to be questioned by a cross-party group of politicians about their activities. Private equity firms and activist investors have found themselves accused in various media and political quarters as making profits at the expense of the country. Much of the controversy has surrounded Apax Partners' buyout of publisher PCM, which involved a number of job losses, and continuing attempts to break up Dutch conglomerate Stork, which has long been the subject of media interest. The cross-party group is thought to be considering recommending various legislative changes, though there is speculation that these would have a greater impact on hedge funds than private equity firms. Marco de Lignie, a partner at Dutch law firm Loyens & Loeff, told sister website PrivateEquityOnline: ?I don't expect domestic measures because everyone is wise enough to understand there are so many interests involved in keeping current businesses growing. If measures should be taken to meet the demand for more transparency, they should be taken on an EU basis rather than at a national level.?

GMB union targets Alliance Boots deal
The GMB trade union, which has arguably become the fiercest critic of private equity in the UK, has now turned its attention to Kohlberg Kravis Roberts' ongoing bid for health and beauty chain Alliance Boots. The union, which recently met with London-based buyout firm Permira after launching a number of verbal attacks, has urged the UK government to delay the proposed £10.1 billion Alliance Boots deal on the grounds that the company cannot support a high degree of leverage without closing ?hundreds? of its high street stores. The £7 billion KKR needs to raise from banks to fund the deal will generate interest payments of about £500 million per year, the union said, assuming an interest rate of about seven percent. Since Boots' estimated profit for its last financial year was around £480 million, the union believes it will not be able to meet its payments without mass closures of local pharmacies. However, a banking source told PrivateEquityOnline the claims were inaccurate: ?Lending sources make credit decisions on the basis of a company's historic cash flows over the last 12 months ? which in this case would include the cash proceeds from all of Boots' high street stores. It is ridiculous to suggest KKR would meet its interest payments by shutting down the sources of this cash flow.?

Pandit to head Citi Alternative Investments
Citi, the global financial services firm, has agreed to acquire Old Lane Partners, a global, multi-strategy hedge fund and a private equity fund with $4.5 billion in total assets under management. Terms of the deal were not disclosed, but it was rumored that Citi paid $600 million for Old Lane, which was founded by a team of industry veterans, including Vikram Pandit and John Havens, formerly of Morgan Stanley. Old Lane will operate as part of Citi Alternative Investments upon the closing of the transaction. Charles Prince, chairman and CEO of Citi, said in a statement: ?[This] is an investment in world-class talent at Old Lane; in a senior leadership team with a track record of building profitable businesses in institutional securities; and an investment in Vikram and John, each of whom has a clear record of achievement in cutting-edge financial services spanning more than 20 years, to lead CAI.? Pandit will become CEO of CAI, while Havens will be president. Both will join Citi's management committee.