Holding the locusts at bay

The risks of social and political activism for private equity firms is explored by Daniel Del'Re (pic) and Hans Nagl of global business advisory firm FTI Consulting.

The global private equity industry may be facing another “locusts” moment. Five years after a German politician roused public sentiment against the industry by comparing private equity investors to “locusts,” many firms are exploring opportunities in markets with little knowledge of private equity, a growing base of local activists and a citizenry willing to embrace politically motivated stereotypes of rapacious global financiers. By neglecting their public profile, private equity firms are leaving themselves vulnerable to similar criticism from politicians and interest groups looking to curry favor with activists and increasingly vocal masses. At best, public criticism is a distraction. At worst, it hinders deal-making.

This vulnerability is already evident in the United States where the industry has become a political target and an unwitting protagonist in a debate about inequality. It may be only a matter of time before similar outcries erupt in emerging markets, where some of the richest opportunities lie. 

Smaller and middle market private equity firms are most vulnerable. These firms do not enjoy the same political cover as the largest firms that have raised capital from government investment funds. And many of them invest through minority stakes, leaving them vulnerable to the machinations of influential company founders who often maintain sway with labour.

The experience of firms active in Germany at the time of the comparison to locusts provides lessons for quelling the conditions that can lead to similar outcries. Their front-footed approach of engaging community groups, politicians, employees and business groups applies today in emerging markets where communities are increasingly vocal and economically empowered. 


Private equity was not new to Germany in 2005 when Social Democratic Party chairman Franz Muentefering decried these firms as locusts. But the industry’s reclusiveness made it an easy target for Muentefering, labuor unions and others disaffected by global finance who blamed outside investors for discomfiting changes to German industry, such as firms jettisoning historical lines of business. 

Franz Muentefering

The effect of Muentefering’s outburst quickly materialised. Some politicians called for rescinding the favourable tax treatment of debt used to finance buyouts. Erstwhile chancellor Gerhardt Schroeder threatened to block deals by non-German investors if the transactions were inconsistent with Germany’s “national interest.”

Critics said that the debt used for transactions burdened the future development of once healthy companies. Uncomfortable attention fell on cases in which acquired companies laid off workers or shuttered business units. Even as valuations soared from 2004-2007, the debate led to claims in certain cases that private equity firms undervalued companies they purchased. 

In response, many firms active in Germany began a vigorous public information campaign. They held numerous meetings with politicians, including local officials and mayors who were influential in the communities where they were making investments. They gave greater support to the German Private Equity and Venture Capital Association, which published reports showing the job creating benefits that private equity brought to Germany. Importantly, the industry also cultivated ties with traditional sectors of the Germany economy that became important advocates for the role of private equity.  

Media accounts from the years following the locusts debate suggest the industry’s openness helped to stanch its public image problems. German buyouts surged 75 percent in the three-year period following Muntefering’s comment, compared to the prior three-year period, as the locusts comment lost its sting. It is overreaching to attribute that success to the industry’s transparency efforts. But those efforts arguably helped keep the market open to private equity investors and maintain the willingness of management and employees to deal with them. 


These lessons carry more weight today in light of recent waves of activism. People from cultures as widely disparate as Russia and Myanmar have drawn inspiration from the Arab Spring to defy entrenched leaders and fight for political reform and more evenly distributed economic prosperity. In relatively prosperous Chile, students have spent nearly a year protesting the cost of university tuition. Rising gasoline prices have triggered violent anti-government protests in Indonesia, a newly popular destination for private equity. And in just one example of public frustration with foreign business interests, protests by residents of a community in Malaysia have stymied plans of an Australian company to build a refinery for rare earth metals in the country. 

By some estimates, there are over 20,000 protests per year in China, which official statistics don’t reflect, as communities rally against elites they blame for tolerating pollution and appropriating land to sell to businesses, both foreign and domestic. Popular outrage materialised most vividly in the village of Wukan where residents ousted local officials and held their own popular election. The recent downfall of the once powerful politician Bo Xilai has sparked a national conversation about the concentration of power and wealth. Perhaps not coincidentally, the domestic banking community has already become a political target; exiting premier Wen Jiabao has recently criticised domestic banks’ monopoly on lending and the profits they generate. 

Back in the US,  the past business practices of presidential hopeful Mitt Romney have drawn criticism as  “vulture capitalism” and spurred media reports of the layoffs and bankruptcies of companies once owned by his former firm. That casts a pall on the industry worldwide as media reports and stereotypes are broadcast easily over blogs and other social media. 

Whether the label is locust or vulture, the threat of activism can surface at any time. Taming it could take years while deals die on the vine. Worse yet, they may be snapped up by competitors who are not seen to be at odds with arbitrary definitions of “national interest.”