The Uneasy Crown

The buy-out business is booming, but capitalism's new kings are attracting growing criticism.

Herod was not the monarch this newspaper had in mind when in 2004 it proclaimed the leaders of the private-equity industry the “new kings of capitalism”. It was Louis XIV perhaps — the sort of ruler whose kingdom grew rapidly in size, power and reputation, just as private-equity firms have done.

Last year the value of private-equity buy-outs, usually by taking private a company which is trading on a public stock market, surged to $440 billion in America and Europe (see chart 1). Ever bigger companies are being gobbled up. On February 7th Blackstone Group won a bidding war for Equity Office Properties, setting a new high of $39 billion, including debt, for a private-equity acquisition.

Few firms seem beyond the industry’s grasp. J. Sainsbury, a British supermarket chain, is among the latest targets. The grapevine buzzes with talk of others, including Dell and even IBM. Such is the fuss that some boosters extrapolate the rise of private equity even to the death of the public-listed corporation, which they argue has become obsolete.

Yet when a group of tycoons gathered in London in January for the Private Equity Foundation, a new charity for children, a trade union picketing the launch said it was “like Herod becoming a patron” of Britain’s National Society for the Prevention of Cruelty to Children.

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Sharp criticism has become a daily nuisance for the private-equity industry. Its leaders, such as Steve Schwarzman of the Blackstone Group, David Rubenstein of the Carlyle Group and Glenn Hutchins of Silver Lake Partners, were treated like royalty at the recent World Economic Forum in Davos. But having to debate “Is bigger better in private equity?” and then listen to Philip Jennings, general secretary of UNI Global Union, tell them they “should no longer consider themselves untouchable” took the edge off their acclaim.

They can be forgiven for a sense of déjà vu. Until recently, private equity seemed to have shed its bad-boy image of 20 years ago, summed up in “Barbarians at the Gate”, a bestselling book about the battle by Kohlberg Kravis Roberts (KKR) to buy RJR Nabisco. But from barbarians to Herod in two decades hardly seems like progress.

The 1980s boom in private-equity deals — then known as leveraged buy-outs (LBOs) — came to an abrupt and messy halt. The buy-out firms found they had over-paid for some acquisitions, credit markets dried up, some of the important providers of finance (such as Michael Milken, the “junk-bond king”) ended up in jail and regulators cracked down on their beloved hostile takeover bids.

Nobody expects to see a repeat of that reverse, even though some criticisms are eerily familiar. Unions complain that buy-out firms are asset-strippers: the London protest was against the axing of jobs by Birds Eye, a food company owned by Permira, the biggest European private-equity firm. But now fellow financiers are also on the attack. “Am I alone in struggling to make sense of private equity’s appeal?” wrote Michael Gordon, the chief investment officer of Fidelity International, in a recent letter to the Financial Times.


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