LETTERS TO THE EDITOR

Summer 2008

by Simon Walker

Sir, 

In just one generation, the venture capital and private equity industry has grown to become a dynamo for growth, innovation and enterprise. This has provoked a debate in which the two sides are now very clear.

On one side are those such as the President of the European Socialists, Poul Nyrup Rasmussen. In his article on private equity, Mr Rasmussen’s critique of private equity can basically be boiled down to “competition is a bad thing, free markets don’t work, and what we need is more regulation”. Although he tries to have it both ways, by accepting that private equity might invest in innovation, Mr Rasmussen clearly sees company take-overs as a “menace”.

I applaud Mr Rasmussen for taking such a clear position, but I regret that he appears to still be living in the 1970s, when central planning and regulation were all the rage. He fails to understand some simple truths which most politicians – including those on the left – now accept.

First, when a private equity fund buys a company it is often because, that company is in difficulty. Were it not taken over it might well go bust and see all its workforce laid off – something Mr Rasmussen does not mention.

Second, studies of such companies show that, after an initial period of restructuring lasting two or three years, new jobs are created. The investment is for the long term – not for short term gains, as Mr Rasmussen contends.

Third, those companies often receive far more investment in innovation and R&D than other companies, boosting productivity, sales and exports.

Fourth, the returns on private equity boost pension funds – many of which support trade unionists when they retire, a fact Mr Rasmussen glosses over.

And fifth, companies backed by private equity have on the whole gone on to be profitable concerns which pay large sums of tax to help fund public services – again, something that does not fit with Mr Rasmussen’s world view.

Should there be more transparency in private equity? Yes. That is why in the UK the industry is implementing new guidelines to improve transparency. But the call for “more transparency” should not become a cloak to hide demands from Mr Rasmussen and others for excessive, heavy handed regulation that would damage an industry that is securing jobs, pensions and long-term prosperity – things that, until reading Mr Rasmussen’s article, I thought the Party of European Socialists wanted.