One of the odd things about private equity firms is just how unprivate they have become of late.
Though they operate in an atmosphere of secrecy and stealth, they have been making highly public appearances on TV news bulletins and, more recently, before parliamentary select committees. The men who run them, such as Guy Hands and Sir Tom Hunter are becoming household names. And the question that follows them wherever they go is: are they friends or foes?
Those who say friends argue that they can intensify competition, bring focus to management and shield companies from the fickle demands of the City. But their buying sprees, helped by a benign economy, sweetened by minimal taxes and fuelled by cheap money have led to accusations of asset stripping and profiteering. Eight heads of private equity houses were hauled before MPs last week to defend themselves against just that charge.
This question is an urgent one for construction firms, now that Hands and the rest are taking a more-than-friendly interest in their sector. Only this week HBOS has been buying up shares in Quintain, and a PriceWaterhouse Coopers report points to more deals on the horizon. Should we be looking forward to bracing, fresh-thinking management, or worry about being trousered by soulless corporate wreckers?
Truth be told, it’s rather less dramatic than that. Private equity firms prefer safe, asset-rich organisations, and although contractors generate lots of cash, their main assets tend to be their contracts, which means they’re about as safe as Russian roulette. Perhaps that’s why none of them picked up anything at Amec’s boot sale. Neither are we likely to see many deals like the £350m stake 3i took in Fosters. Architects’ value often depends on a few key individuals.
It’s different for housebuilders and materials firms. They will remain targets because of their assets and income stream. Here there is, so far, no evidence of asset stripping or aggressive cost cutting. But how their new masters react to interest rate rises and tougher trading conditions will really test their mettle.
The big shunt
Metronet has finally been put out of its misery. It leaves behind a mess for London Underground, uncertainties for the travelling public and a financial headache for Gordon Brown. The only one who has emerged with reputation elevated is Ken Livingstone, whose insistence that the PPP would fail became something of a self-fulfilling prophecy. We still have to wait for the arbitor’s review before we learn where the balance of blame lies, but a few things can be grasped in this cloud of uncertainty. First, despite what the mayor says, Metronet’s failure does not prove PPPs are fundamentally flawed; Tube Lines’ success demonstrates the opposite. Second, as we said two weeks ago, if you sign a contract that is 2m taller than you, you’re in trouble right from the start.
Denise Chevin, editor