Magazine article Management Today

Private Equity off the Leash

Magazine article Management Today

Private Equity off the Leash

Article excerpt

The rise and rise of PE is changing the corporate landscape and shifting the balance of power in the City. Investment banks are no longer top dogs, having ceded territory to an aggressive new breed Matthew Lynn reports from the Square Mile.

Where do top chief executives go when they get eased out of power? A few years ago the answer would have been simple. They might collect some non-executive directorships. They might chair a bank. And maybe pick up a peerage or a quango to run. Now, the chances are that they'll find themselves a comfortable berth in the private-equity industry - along with an occasional ex-prime minister or ex-president of the US.

Take Lord Browne, the suddenly-retired CEO of BP and for many years Britain's most admired businessman. Despite quitting unexpectedly last month following revelations about his private life, Browne will still be chairing the advisory committee at private equity outfit Apax Partners. And Lord Hollick, who used to run United Business Media and was best known as the proprietor of the Daily Express, is now a partner in Kohlberg Kravis Roberts.

Sir John Major has been an adviser to the Carlyle Group - as, of course, has the first president Bush. Jack Welch, who was probably the world's most celebrated businessman when he ran GE, is now a 'special partner' at the New York private-equity firm Clayton, Dublier & Rice. Meanwhile, Lou Gerstner, the chairman and CEO credited with saving IBM in the 1990s, is now chairman of Carlyle.

That is just one measure of how, in the past few years, private equity has moved from the fringes of the financial universe to its very heart.

The impact of private equity on the economy has been widely discussed - and remains controversial. Yet at the same time, it has transformed the financial markets. PE funds have become among the most lucrative sources of fees for banks. They have made huge sums of money for their bankers and advisers - and for the fund managers who invest in them.

But they have also provided competition. Companies no longer have to go to a bank for an IPO - they can also go to a PE fund. By offering a ready and accessible means of finance, these funds have taken companies away from the public stock exchanges. Indeed, the biggest PE firms, such as KKR and Blackstone, are now the equal in prestige and power of the big investment banks - prompting rumours in the markets that even the likes of Goldman Sachs or Lehman Brothers could end up being owned by a PE fund.

It's a long time since these funds were regarded as outside the financial mainstream. They are now simply too powerful for anyone in the City to ignore. 'This year, I was invited to the Stock Exchange Christmas party for the first time,' says Jon Moulton, founder of the Alchemy Partners PE fund. 'I was invited to a breakfast at the Bank of England. That never used to happen. We used to be considered beyond the pale, but we've moved into the mainstream now.'

Says Kevin McNally of consultancy Arbor Square Associates, which has studied the impact of the PE funds on the financial markets: 'The alternative assets industry - and that includes hedge funds as well as PE houses - has been one of the major sources of growth for the City over recent years. I wouldn't say it has sucked all the talent out of the traditional banks, but it has certainly provided an attractive alternative for talented financiers.'

Certainly, no-one in the financial markets can afford to ignore PE funds any more. They have too much muscle. The funds have been raising money on a colossal scale, and they haven't been nervous about spending it either.

PE firms have drawn in an estimated dollars 210 billion in funds since the start of 2006, according to figures compiled by Bloomberg. Add in the leverage that PE firms always use, and that gives them the power to do deals worth dollars 2 trillion. That kind of cash would allow them to buy the world's biggest company - currently Exxon Mobil, with a value of dollars 445 billion - four times over. …

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