Way back towards the end of the last millennium, a best-seller was published entitled Barbarians at the Gate about the excesses of financial operators who specialised in ‘leveraged buy-outs’. This practice involved skilled manoeuvring whereby corporations that were regarded as underpriced by the markets were bought largely with borrowed funds, lots of redundancies were declared, many of the physical assets were sold, and eventually the object of the buy-out was also sold, at a vast profit to the financial operators themselves.

There has been a lot of flak aimed at private equity groups of late. There is nothing wrong with the concept of private equity as such. Indeed, where would capitalism be without it? Entrepreneurs, and people backing them with their own money, have been at the forefront of economic growth for several hundred years. The invention of the public limited liability company in the 19th century made all sorts of industrial and economic progress possible. But one area where the private equity groups have run into trouble is the secrecy that surrounds so much of their business. The famous ‘mixed economy’ involves the release of a great deal of information from public companies: indeed, it demands a degree of public scrutiny that is not incumbent on private equity companies.

If we look back to the capitalism of the past 50 years we find a literature, dominated by the great JK Galbraith, which examines the power of the corporation; then comes a reaction: the ‘industrial raiders’ who shake up the established corporations, so that analysts and financial commentators are able to say ‘hey presto: the top ten corporations of ten or twenty years ago have been replaced by completely different organisations.’ This is all part of the ‘creative destruction’ lauded by the great economist Joseph Schumpeter. But the big worry about private equity is very basic: most people in my experience accept that, with what are known as ‘start up’ companies, private equity can contribute much to the common weal. Unfortunately, the overwhelming impression is that, when the barbarians arrive at the gate of well established corporations, they may well be capable of ‘shaking up’ entrepreneurial operations that have become ‘institutionalised’; but, more often than not, they cause great disruption, with dubious benefits for the wider public, let alone for the corporations they (briefly) take over.

In response to the widespread charge that they have something to hide, private equity groups have come out of their corner with fists flying. At the annual conference of the private equity world in Frankfurt, Stephen Schwarzman, co-founder of the mighty Blackstone Group, was quoted in the press this week as complaining ‘there are people out there that are trying to interfere with what is going on in the [private equity] business.’ If there is one thing that is at the heart of the private equity business, it is the desire, nay compulsion, to interfere with what is going on in other people’s business. — The Guardian