Many private equity businesses have been linked with the loading of debt and the resultant collapse of many important businesses.....Although the collapse of Petroplus, Southern Cross Care Homes and Comet and many other companies reached the media and their stories are common knowledge throughout the U.K., I don't think we have actually been given the full story of what has happened to these and many other companies that are no longer with us.
.......X-ECONOMICS has previously posted articles on Petroplus, Southern Cross and Bain Capital.
Bain Capital, a company that was formed by Mitt Romney has bought the U.K.'s Blood Transfusion Service which includes the freely donated blood of British people. But what you may not have heard through the usual media is that 22% of businesses invested in actually collapse once Bain Capital have invested in them! Yet our government has given the go ahead for Bain to buy our blood service under the 'Section 75 Reforms' which is actually privatisation of the vast majority of the NHS even though David Cameron continues to deny that the NHS is being privatised. The businesses that have collapsed under bain I have suffered under typical abuse which has become customary by such equity companies. A combination of loading of debt, job cuts and asset stripping!
Many health and pharmaceutical type businesses that Bain has controlled are now bust. But of course the media generally doesn't blame the management of these equity companies.
.......They get to run these companies not so much because they have some rare genius ability to run these companies, but because of their relationship with people in control of stacks of money such as pension funds, banks and Insurance companies. This simply gives them overwhelming power to buy control of these businesses, regardless of their qualifications or any training that would be expected for some body to merely work for the company!
-What businesses like Bain Capital and Blackstone do is based around investments and return on investments.-It doesn't have quite as much to do with the hands on running of the company as the media would have you believe.-Much of what they do isn't particularly clever. Much of it involves cost cutting which gives short term returns, but damages the long term prospects of the company.
To give an example, lets take Blackstone Capital. One of the worlds most successful Private Equity Companies. The people working for Blackstone no doubt have economics, finance and business qualifications but these qualifications are a total waste at Blackstone Capital. This is what happened to Southern Cross. Until it's collapse, it was the U.K.'s largest care home operator. Looking after thousands of elderly and disabled people..............
................Having acquired a number of care home businesses and bringing them under the umbrella of Southern Cross Health Care, the management decided to take every property which the business owned and sell it off for cash! All the property was sold to other similar investment businesses, who lets be honest, were not buying them so they could contribute to helping the old and disabled, but to get their own return!-Seeing as tax payers are paying much of these costs through benefits, and many elderly are funding their care through selling their own homes, you can see why the property of Southern Cross Health Care was in big demand from investment businesses, hedge funds, other private equity companies etc....-So the property was all sold.........
...............Some years later, the business collapsed under debts. Blackstone blamed the new landlords of the properties they had sold for demanding rent that was at to high a rate! -They also blamed problems within the economy. But the economy wasn't the cause. The cause was to put it politely incompetence by Blackstone. Or maybe less politely, it was caused by the typical short turmness of the strategies of these investment businesses. When they put the cash from the property sales into an off shore bank account, they surely knew that the selling off of all the property would be damaging to Southern Cross Healthcare, in the long term.
One of the problems which encourages bad decision making from private equity firms and other similar investment companies is that they don't have to make a success out of a company to make money for their own equity company. They will make money regardless. Private Equity firms and banks still make money even though investments may appear to fail! One reason contributing to this is that private equity firms charge their investors a percentage of their investment, whether it is successful or not. Private equity companies have been known to lose an investors cash in full, and then send them a bill for their services as their is nothing left of their investment to take commission from! The basic costs of wages and running costs of offices are paid for not by the businesses they are seen to be running but by their investors. And this creates a clear problem. These businesses that are run by private equity firms do not have to be treated as a sacred commodity. In fact what happens is the opposite. The business is not treated as a valuable commodity at all. It's treated as a cash cow for short term gains!
When Permira bought the AA, the UKs largest motorist's break down service they immediately sold off all the break down trucks. After they were all sold for cash, whenever they needed a break down truck, they had to hire one from a private owner. This is just like Blackstone selling their care home properties off to landlords.The result is exactly the same. The private equity company receives a bundle of cash, but then has to pay a higher cost out to rent back what they have just sold off. Selling off your own home and renting it back could seem a good idea while your spending the money from its sale on holidays and luxuries. But you know the day will come when you won't have the money to pay the rent. It has short term benefits. But at the cost of long term sustainability!Okay, so the AA hasn't gone out of business. Well that was always unlikely due to domination the organisation has in it's market. But the charges to customers have risen substantially. Many customers only being able to afford for a tow service to the nearest garage, where as before the buyout by Permira, the price for home relay, that is towing you to where ever you are going in the country, or all the way home was affordable for most. The price for that service is now substantially higher than back in the pre-Permira days. You have to also bare in mind that as time has gone on , vehicles are more reliable and break down less often, which should reduce the rate that costs rise.
When Boots was bought Kolberg Kravis Roberts, they opened opticians in the stores, but made their own rules on the eye tests that had to be taken. Charging many contact lens customers for two tests when only one was required by regulations. KKR have since bought up other competing opticians like Dolland & Aitchson who are now operating under the same rules as the Boots Opticians. Costs for eye tests have risen significantly since. The Merger & Acquistion Commission supposedly made an inquiry before Boots took over Dolland Aitchson, but as usual in these cases, it was allowed to go ahead. Boots still forces clients to take tests that are not required by any health regulator, but they still tell customers that they are acting on regulations.
Riverstone and Carlyle, both private equity companies were involved with petroplus, the oil refinery company before it collapsed. There were a number of problems that contributed to its collapse. First was debt. Private Equity companies are all about debt. Riverstone and Carlyle own masses of businesses and property portfolios around the world. Todays figures would probably be in excess of $170 Bn between them in investments! These businesses invest money mostly in established business and property. They don't actually create very much themselves. If you was to kind of compare them to a private landlord of domestic homes, Riverstone and Carlyle (Like KKR and hundreds of others like them) are really most accurately described as.....'Landlords of Businesses'........They buy a business just the same as a landlord would by a property....With usually around these days 75% borrowed money!
Petroplus bought up existing refineries around Europe, all with borrowed money. Even though they may have been originally financed via Riverstone or Carlyle, it is not Riverstone or Carlisle who will be responsible for the debt their after. The oil refinery business of Petroplus will be responsible for the debt. (If debts are loaded onto a business by a private equity firm, the business-not the private equity firm is at risk of collapse.-But if the business invested in does collapse, banks who provide the finance to the private equity firms will be 'bailed out' by the pension funds investing in the private equity firms!). So when these private equity firms buy up businesses, they often put the businesses they buy at substantial risk......Whilst risking little themselves.-...because it is the investors into the pension funds investing in the private equity firms that will be at risk.-...These pension funds are used to guarantee any funding from banks, so the banks are at little risk whilst taking part in these deals. The petroplus story is very complicated. To be honest it has probably been made more complicated in order to prevent people from knowing what was going on with the company. For example, petroplus set up it's own finance company....Petroplus Finance Ltd........... which could issue bonds for Petroplus through an investment bank! It was non payments on interest on 7 year bonds which brought in the administrators. Also Petroplus Finance was charging financial services to Petroplus even whilst Petroplus was losing money. (Petroplus Finance could profit whilst actually adding to the debts of Petroplus. If you set this up knowingly it would be the big F word and because it issued some billions of dollars in bonds, this was probably a likely scenario)........Also conveniently, Petroplus finance was based off shore I, think in Bermuda where profits tax free, but also accounts can be kept secret.........I wonder why they might want to do that?
Any way, the point of this post........
For people to understand the real effects that the private equity firms have on all our lives. They are involved in all types of businesses. Britain and the U.S. again have been leading the world in private equity business, with the U.S. pretty much dominating the world.
The financial press and media give them far too much respect. I don't mind if they have done something comendable, fine report it. But they don't report the other side. The examples above are just a few old examples of how thes businesses operate. Often you will about how prices are rising. Rising costs are blamed. The economy is blamed. All too often I hear of extortionately rising prices for a type of business only to find that business and possibly it's associated has been taken over by a private equity company/companies......But the financial press turns a blind eye........Because private equity is good business for the financial industry........................................Just like a blind eye is turned to the private landlords who have been buying properties for years, whilst rents have had to be paid by the tax payer where a tenant has become unemployed!.......Or in fact in reality has been added to the national debt............................Irony?......................Or is it that the ability of the financial system to make money from undermining the economy is actually a higher priority than getting the national debt under control ???!
...............The picture becomes clearer day by day by day............
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