March 27, 2007 | posted by Michael Baxter in IABN |

Yesterday, the Works Foundation revealed their thinking on private equity. It’s good and bad, they said. When private equity buys into a company and keeps the management in place, then more jobs are the result. But, if it replaces the management team, then jobs fall.

Will Hutton, chief executive of the Work Foundation, said: “Private equity firms pride themselves on their ability to squeeze performance from the organisations they own, and they turn up the pressure on individuals in order to do so. When private equity backs an incumbent management team the result can be improved productivity and higher employment. But we are concerned that often, the price that is paid by workers is too high and that levels of trust between workers and managers suffer.”

While, on the face of it, the Works Foundation report seemed to strike a balanced position, with pros and cons for private equity, others are not so sure.

After all, Mr Hutton added: “There is now an urgent need to ensure private equity firms throw open their books to proper public scrutiny, that they pay appropriate levels of tax, and that the growth of private equity is not exposing the entire British economy to a risk of instability due to the levels of debt the industry takes on as it grows.”

Well, let’s examine the Works Foundation research.

It found that if private equity replaces management, job losses follow. All we can say to that is ‘duh’.

Of course job losses follow. If private equity feels management needs replacing, then the chances are that it’s not happy with the way the firm is run at all.

The higher level of gearing that private equity purchase entails, does bring with it dangers.

But then so too, does the current way. British business remains relatively poor in terms of productivity, and we face more and more competition from abroad. Private equity holds part of the answer.

David Morgan, a reader of this newsletter, and MD of Infotec Financial (UK) Ltd reckons: “Where a private equity company retains a management team, this indicates that it has bought into not only a set of assets, but also the current strategy of the business.” “But where,” he continues, “a private equity owner replaces a management team, the implication is that the new owner has not bought into the current company strategy. This implies major changes under the new management team, probably involving the sale or closure of sizeable areas of business activity. Also, a frequent perceived shortcoming of the previous management in such circumstances is that it was too ’soft’: it wasn’t ’sweating its assets’ sufficiently, i.e. the company was overmanned. So here are two potential reasons for major job cuts under this management-replacement scenario, both of which may be valid in order to ensure the long-term health of the business.”

Agree or disagree? Tell me what you think on the editor’s blog at Find.co.uk

Copyright #169;#169; 1996-2007 Find.co.uk Limited. All rights reserved