Businesses that would otherwise fail depend on private equity firms to rejuvenate them, particularly during times of economic and market distress, said Simon Walker, chief executive of the British Venture Capital Association.
“In a world where the banks have stopped lending and everyone else seems to be hunkering down, private equity is busy adapting to the changed environment,” he said at the annual Conservative Party conference taking place in Birmingham this week.
“It is in the fortunate position of sitting on large piles of cash – global funds have raised more than $320 billion dollars in the first half of this year despite the credit crunch – and it is putting its funds to work to keep the economy turning over.”
Hotel chain Travelodge, clothing retailer New Look, bread maker Hovis and restaurant chain Pizza Express are among the UK businesses that have been “fixed” by private equity, Walker told attendees at a fringe event yesterday.
“Do you remember what happened to Rover?” he asked, recalling how Jon Moulton’s Alchemy Partners bid for the British carmaker in 2000, but ultimately failed to reach an agreement. Had Moulton’s firm taken over the company, Walker said, “there would have been layoffs and job cuts, and production line rationalization. No doubt everyone would have said how ruthless he was. But I suspect we would still have had a British-owned car industry. And we wouldn’t have seen £10 million a week of your money being poured down the drain trying to prop it up until the government decided it could allow it to fail.”
In 2000, BMW sold much of the mass-market car activities of the Rover Group to the Phoenix Consortium who established it as the MG Rover Group. By 2005, the group became insolvent and was sold to the Nanjing Automobile Group. At the time of the insolvency, the UK government announced a £6.5 million loan to sustain the business for its first week in administration.
Walker noted several times that private equity general partners are not philanthropists, but sought to distance their long-term investment strategy from short-term-focused hedge funds and their compensation from investment bankers.
While admitting GPs can make “huge, mind-boggling sums of money which put them right up there with the (David) Beckhams and pop stars”, Walker stressed that unlike some investment bankers who “have led their businesses to disaster and still walk away with unimaginable sums of cash stuffed in their trousers”, in private equity “if you get it wrong, you lose your own money as well”.
He concluded by telling the crowd that if they hope to see more start-ups, higher productivity and skill levels and “if you want the UK to compete globally, then you will agree with me that we need more private equity, not less”.
Walker made similar remarks at the annual party conferences for both the Labour Party and the Liberal Democrats, which took place over the last two weeks. The BVCA, as well as the European Venture Capital Association, has been increasingly vocal about private equity's benefits of late as the industry faces potential regulation by the European Commission.