Once synonymous with men in red braces peddling junk bonds, the leveraged buy-out industry has become almost respectable. This is in large part thanks to some clever rebranding that would make even David Cameron blush; now invariably described as ‘private equity’, which sounds a lot cuddlier, the industry has even enticed that holier-than-thou old rock star Bono to hop on to its gravy train.
Private equity companies, such as the former U2 star’s $1.9 billion Elevation Partners, are investment funds that borrow money to buy companies, manage them for a few years and then sell them on, ideally at a huge profit. The business pages are full of this industry’s exploits, led by companies which until two or three years ago few of us had heard of — the likes of KKR, Blackstone, Cinven, Carlyle, CVC Capital Partners and Texas Pacific — but which are now involved in virtually every City deal.
One in five British private sector employees now works, directly or indirectly, for a private equity firm. The most recent name to succumb was Thames Water, snapped up by Australia’s Macquarie for £8 billion. From the AA to Birds Eye and Gala Coral, the industry owns huge chunks of corporate Britain.
Private equity companies raise funds from outside investors, including pension funds and wealthy individuals. The funds are structured as limited partnerships: the private equity company is the general partner, taking management and investment decisions and charging hefty performance fees; investors have a passive role as limited partners, providing funds and eventually sharing in the profits.
Whenever the general partner identifies an investment opportunity, it calls for the required capital (the private equity) from the limited partners, who cough up in proportion to their share of the fund.
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