A prime example of this is what is happening to the AA under the ownership of Permira (a private equity company). I cba explaining, but found a good link here
Since the private equity firm Permira helped take over the AA in 2004, about one third of its workforce of 10,000 have lost their jobs.
Former award-winning AA patrolman Steve Thompson is among several current and former AA staff who tell the Money Programme that private equity has, in their view, damaged the company they love.
"If anybody hears that private equity is taking over their company, beware of the signs," he says.
Some of the AA's staff were represented by the GMB trade union. Its officer Paul Maloney is critical of the management's approach during the job cuts. He describes it as "horrendous" and says it amounted to "corporate bullying".
The reasons that private equity companies make such a great profit when selling on a company is due to the ruthless business model that is involved. They buy a business for an above market price using borrowed money, securing the debt on the company, then they do two things:
- Cut costs in every possible way (ie. cutting levels of customers support is the first thing, job cuts all round, lowering the overall QoS etc...)
- Get as many customers as they can possibly get ahold of, even if it means making a substantial loss on each and every customer gained. This leads to unsustainable services and lowers the quality for each and every customer, no matter how much they pay.
Then when the numbers look artificially good, they sell up for a price that pays their debt to the bank and makes them a substantial profit at the same time.
A private equity group has NO interest in the customers, staff or QoS of any company it acquires. Its sole purpose is to make a substantial profit when they come to sell the company on. Private equity groups are ruthless with cutting costs to increase profits, they dont really give a shit if it impacts upon customers services.
Private equity also isnt without pitfalls, and it removes any gurarantee of service, as it is 100% dependent upon the current financial market as the key to its success (which is the reason the majority of any debt accumalated in the purchase of the company is secured on the business, not the PE group).
But then there's the small issue of debt. The private equity owners loaded the AA with £1.3bn of borrowed money during the takeover. This has since risen considerably.
Understanding how this works is the key to understanding the private equity buyout system.
Some £1.3bn of the AA's initial buyout of just less than £1.8bn came as loans arranged by Barclays Bank.
Former venture capitalist Peter Folkman argues the prudence behind this level of debt is dependent on the general health of the economy.
"If the company is making more profits, it can service the debt. That's fine," he reasons.
"If we get hard times then, undoubtedly, it'll make the AA much more vulnerable."
As private equity investors become bigger players in the UK economy - the £11bn buyout of Boots is set to be the largest ever in the UK - there is concern at very high levels at the size of the debt being piled on the companies that get taken over.
The Financial Services Authority has raised concerns that one day a private equity company might collapse under the weight of its own debt.
Now personally, I like to be with companies that are in it for the long run, have investors and owners who give a damn about their customers, and are financially secure in all market climates and not liable to callapse because of a small change.
If you would rather be with a company that doesnt give a shit about you as a customer or the staff that work to provide your services, and is only providing your service as part of a short term investment and profit making scheme then thats fair enough.
I have taken a keen interest in how PE works in the last few months, after constantly seeing bad press regarding them on various business and investment programmes and websites.