Another Private Equity Scam

Once upon a time, back in the 1980s, there was some justification for private equity.  A sleepy company underperforming (and there were plenty of these in the 1980s) could be positively helped by a private equity fund acquiring control, usually using borrowed bank cash as leverage to do so.  Jon Moulton’s Alchemy Partners has a good record of this activity.

Now however, private equity has become yet another City scheme (scam) for channelling money to itself.  Saga and the AA are two good companies whose employees have the misfortune now to be employed by something called Acromas, a creation of the private equity companies Charterhouse, Permira and CVC.  To buy out 80% of the pre-existing shareholders of Saga and the AA (20% shareholding rests thankfully with the staff), Charterhouse and co borrowed £4.8 billion from Barclay Capital plus another £1.5 billion, totalling £6.3 billion.  The effect of the interest payments being made on this gigantic sum has been to turn a previous operating profit by Saga and the AA of around £183 million into a loss of £529 million, the difference of around £700 million being due to the interest payments on the borrowed £6.3 billion, i.e. a usurious interest rate of around 11%.  No wonder Barclay’s and their like don’t want to bother with SMEs (small and medium-sized enterprises) with their (by comparison) penny packet businesses needing actual tedious work to be done.

The overall effect of this deal is that the 12,645 employees of the AA and Saga have exchanged their former owners for the dubious benefit of Acromas, whose chief executive (on £1.47 million salary) expressed himself well pleased with this year’s financial performance.  At the going City rate of 3% of £6.3 billion (£200 million or so) to be paid in fees from the efforts of the employees, as well as huge undisclosed sums ending up with the trio of hedge funds, there is no sign of any added value remotely comparable with these vast costs, nor will there be (see Two more major British Companies fall under foreign control).

The City will never reform itself simply because takeovers (mergers and acquisitions – M&A as it is colloquially called) are so wonderfully lucrative.  Only amendments to the Takeover Code, given the force of law, as set out for example in Produce and Prosper, section 10.5.2, or in changes to the Business Environment in the Summary document will make any difference.

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