Private equity 'next bubble to burst', unions warn

The private equity industry poses a "looming disaster" to the economy as firms struggle to refinance billions of dollars of loans taken out during a buyout boom earlier in the decade, a transatlantic coalition of unions warned today. Britain's Unite union joined forces with the US Services Employees International union (SEIU) to kick off a campaign for greater transparency and tighter regulation over the finances of powerful, low-profile private equity firms. The unions warned of "crippling defaults around the world" as more than $500bn (£346bn) of private equity debt needs to be renegotiated by 2010. They cited a prediction by Alchemy Partners' boss Jon Moulton that up to 30% of mid-market buyouts could end in default. "The next bubble to burst will be private equity," said Jack Dromey, deputy general secretary of Unite. "There's no question but that we have a looming disaster in our economy." In a surge of deals between 2005 and 2008, scores of household names were swallowed by private equity including Hilton Hotels, Boots the Chemist, the carmaker Chrysler and Harrah's casinos. Unite and the SEIU say that nearly 10 million people in Britain and the US now work for firms under private equity ownership. They want full disclosure by private equity firms of their debt situation including loan repayments, debt-to-equity ratios, the identity of lending banks and the structure of covenants. "Buyout firms have been part of the problem, not part of the solution," said Andy Stern, the SEIU's president, who called on the industry to "come forward and be part of a dialogue" over concerns for the future. Unions are hoping that the Obama administration will take a tougher line on private equity than the Bush regime by abolishing preferential tax treatment used by the industry and by introducing requirements for greater transparency. But the Private Equity Council, which speaks on behalf of buyout firms, roundly dismissed the unions' comments and said it was "patently absurd" to suggest that the industry was partly to blame for the present financial crisis. "Private equity partnerships invest in bricks, mortar and people, not complex financial instruments," said the council's president, Douglas Lowenstein. "Private equity partnerships are one of the few sources of capital that can help get the economy back on track. This seems to be the right time to encourage private equity investment, not slow it down." Leading firms concede that they face several years of meagre opportunities as the credit crunch takes its toll, with their focus likely to be on managing existing portfolios rather than new deals. Speaking at the industry's annual gathering in Berlin, Henry Kravis, cofounder of US private equity firm KKR, said he planned to focus on extracting profit from companies it already owned as the US and Europe fell deeper into recession. "Nothing, I mean nothing, is more important than effectively managing our portfolio companies right now," he told hundreds of private equity executives at the Super Return International conference. "It means efficiently managing balance sheets, preserving capital and seeking new opportunities." Kravis was one of the few "titans" of the private equity world to venture to Berlin, compared to the celebratory jamboree in Frankfurt two years ago, which provoked mass protests by unions and politicians who accused the industry of asset stripping, cutting wages and financial engineering to extract profits. These days, private equity firms struggle to finance acquisitions after banks cut off the debt financing that fuelled a two-year buyout boom. Investors have also become wary and in many cases have withdrawn the promise of funds to private equity buyout vehicles. The recession and last year's stockmarket losses have forced firms to write down a considerable proportion of the value of some of the $1.5tn of investments they made between 2006 and 2007. Echoing the comments of industry rivals, Kravis said: "We have to accept the fact that deals will be smaller. The financing for large transactions simply is not available in the current environment. That's a fact." Investments with "defensive outlooks, superior management teams and a proven method of value creation" have contributed to the long-term strength of KKR's portfolio, Kravis said. He pointed to Alliance Boots as an example of the long term investments that can survive in a downturn. He said the chemist chain, which KKR bought for £11.1bn in 2007, had "historically held up well during periods of economic weakness".