The.Economist.2007-02-10 (966424), страница 38
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“In this situation, size will matter,” she laughs. Her ambition is to turn Incwala into the BHPBilliton or Xstrata of tomorrow. Incwala is now busy raising debt to refinance existing liabilities and pay forfuture acquisitions. The target is for Incwala to manage at least one mine within the next two or threeyears. Then a listing may be on the cards.Panning for goldFinding new assets should be relatively easy and several deals are in the pipeline. Mining companies arerequired to fulfil their empowerment responsibilities in order to keep their mining rights. Incwala helpedLonplats convert its mineral rights, the first platinum company to do so.
It is also helping craft the socialand community programmes required by the government. This could make Incwala an attractive partnerfor other mining companies with similar needs. “Everybody returns my phone calls,” smiles Incwala'sboss.But turning an investment company into a mining one will be tricky. Ms Mavuso Mbatha can do deals, butshe is no miner.
So far, Incwala is a one-woman show, with a total staff of five. In a country short onskills, finding the right people will not be easy. Talented black professionals are either climbing corporateladders or chasing empowerment deals of their own. And the commodity boom means skilled workers ofany colour are being pursued by foreign companies as well as local ones.BEE has been criticised for creating dealmakers, rather than genuine entrepreneurs and much-neededjobs. This is a fair point, Ms Mavuso Mbatha admits, but things are changing, and she wants to be part ofthat change.
Her parents' generation fought for political rights. “My generation”, she says, “will be judgedover whether it helps create a sustainable economic miracle to maintain political freedom.”Copyright © 2007 The Economist Newspaper and The Economist Group. All rights reserved.About sponsorshipPrivate equityThe uneasy crownFeb 8th 2007 | DAVOS, LONDON AND NEW YORKFrom The Economist print editionSharon TancrediThe buy-out business is booming, but capitalism's new kings are attracting growing criticismHEROD was not the monarch this newspaper had in mind when in 2004 it proclaimed the leaders of theprivate-equity industry the “new kings of capitalism”. It was Louis XIV perhaps—the sort of ruler whosekingdom grew rapidly in size, power and reputation, just as private-equity firms have done.Last year the value of private-equity buy-outs, usually by taking private a company which is trading on apublic stock market, surged to $440 billion in America and Europe (see chart 1).
Ever bigger companiesare being gobbled up. On February 7th Blackstone Group won a bidding war for Equity Office Properties(see article), setting a new high of $39 billion, including debt, for a private-equity acquisition.Few firms seem beyond the industry's grasp. J. Sainsbury, aBritish supermarket chain, is among the latest targets.
Thegrapevine buzzes with talk of others, including Dell and even IBM.Such is the fuss that some boosters extrapolate the rise of privateequity even to the death of the public-listed corporation, whichthey argue has become obsolete.Yet when a group of tycoons gathered in London in January for thePrivate Equity Foundation, a new charity for children, a trade unionpicketing the launch said it was “like Herod becoming a patron” ofBritain's National Society for the Prevention of Cruelty to Children.Sharp criticism has become a daily nuisance for the private-equityindustry.
Its leaders, such as Steve Schwarzman of the BlackstoneGroup, David Rubenstein of the Carlyle Group and Glenn Hutchinsof Silver Lake Partners, were treated like royalty at the recentWorld Economic Forum in Davos. But having to debate “Is biggerbetter in private equity?” and then listen to Philip Jennings,general secretary of UNI Global Union, tell them they “should nolonger consider themselves untouchable” took the edge off their acclaim.They can be forgiven for a sense of déjà vu.
Until recently, private equity seemed to have shed its badboy image of 20 years ago, summed up in “Barbarians at the Gate”, a bestselling book about the battle byKohlberg Kravis Roberts (KKR) to buy RJR Nabisco. But from barbarians to Herod in two decades hardlyseems like progress.The 1980s boom in private-equity deals—then known as leveraged buy-outs (LBOs)—came to an abruptand messy halt. The buy-out firms found they had over-paid for some acquisitions, credit markets driedup, some of the important providers of finance (such as Michael Milken, the “junk-bond king”) ended up injail and regulators cracked down on their beloved hostile takeover bids.Nobody expects to see a repeat of that reverse, even though some criticisms are eerily familiar. Unionscomplain that buy-out firms are asset-strippers: the London protest was against the axing of jobs by BirdsEye, a food company owned by Permira, the biggest European private-equity firm. But now fellowfinanciers are also on the attack.
“Am I alone in struggling to make sense of private equity's appeal?”wrote Michael Gordon, the chief investment officer of Fidelity International, in a recent letter to theFinancial Times.Regulators, too, are growing agitated. Last year Britain's Financial Services Authority concluded after aninquiry that at least some of the industry's activities will end in tears. America's Department of Justice isinvestigating whether the increasingly common bidding consortia, in which several private-equity firmsclub together, are in breach of antitrust laws. Last month the Federal Trade Commission ordered Carlyleand Riverstone to cease day-to-day involvement in one of the two energy firms they own, so as to ensurecompetition.
In Congress Barney Frank, the new Democratic chairman of the powerful House financecommittee, is due to hold hearings on private equity.Shareholders of targeted companies are also starting to smell a rat. They suspect that top managers, whousually remain in charge when their business passes into private hands, are selling too cheaply in order toget a bigger slice of the profits for themselves when the private-equity buyer eventually sells the firm on.Recent attempts to take ClearChannel and Cablevision private met fierce opposition from shareholdersfeeling short-changed.Making their caseThe kings of capitalism have started to respond. In December several top American private-equity firmsformed the Private Equity Council to fight their corner in Washington, DC. Similar groups already play thatrole across the Atlantic.In Davos Carlyle's Mr Rubenstein conceded that the industry “does an awful job” in presenting itself to thepublic.
Rather than talk about the jobs created for blue-collar workers, too often people in private equity“brag about how much money we make”. As a first step, the private-equity bosses agreed to sponsor atwo-year research project. Mr Rubenstein expects it to show that “most of the money we make goes topublic pension funds. We create a lot of jobs and pay a lot of taxes.”The main defence offered by private-equity firms is that they aregood for the companies they own and for the economy as a whole.Henry Kravis of KKR claimed last year that private-equity investing“leads not only to value creation, but also to economic and socialbenefits, for example, increases in employment, innovation, andresearch and development”.The past three years have been extremely good for private equitywith returns for all but the smallest funds comfortably beating theS&P 500 index (see chart 2).
Long-term performance also looksstrong, at least at first glance. From 1980 to 2001, the averagefund generated higher gross returns than investing in the S&P 500,according to a study by Steve Kaplan of the University of Chicagoand Antoinette Schoar of the Massachusetts Institute ofTechnology.Given the obsession of investors with yield, no wonder so much money has poured into private equity.There are now some 2,700 private-equity firms, managing assets of $500 billion. They are led by anumber of giants (see table 3). Only two years ago the largest fund was worth $6 billion, but somereports say Blackstone's fund is now worth some $20 billion.However, the headline numbers come with caveats. First, they do not include the typically huge fees paidto the general partners who manage the funds.
Mr Kaplan and Ms Schoar found that, on average, thereturns to investors after subtracting these fees were slightly lower than they would have received byinvesting in the S&P 500 in 1980-2001.Secondly, they found huge differences in performance between funds. In 1980-2001, the top quartile ofprivate-equity funds produced an annual rate of return of 23%, well ahead of the S&P; the bottom quartileearned investors only 4%. Not only was there a large gap between the best and the rest, but theirrespective performances were also remarkably consistent. The study showed that the winners in privateequity tend to keep on winning and the bad firms stay bad—if they remain in business. Anecdotalevidence suggests that this pattern has endured, with the notable change that big firms are nowoutperforming the rest and in turn attracting a disproportionate slice of new money.What makes a top performer? Mr Kaplan lists some characteristics: the expertise to analyse deals and addvalue; the ability to attract the best executives and other talent to companies; and a strong network tosearch for deals, sometimes avoiding auctions.Some suspect that success is all about higher levels of debt.
Private-equity firms borrow heavily to buycompanies—the equivalent of a gambler borrowing money to double his bet. Given that higher leverageequals higher risk, where is the benefit? As Fidelity's Mr Gordon puts it, ultimately investors in privateequity are backing the same companies that they held as listed groups. “Performance over time will bedriven by the same factors: earnings growth, cost management and so on,” he adds. “The difference isleverage.
Strip out the leverage and the correlation with quoted equities is tight.”There is a lot to this. In the early days leverage was responsible for most of the superior returns.Moreover, the easy credit of the past three years has helped. (An arguably worrying development hasbeen the rise in “leveraged recaps with equity dividends”, whereby a recently acquired company borrowsheavily in order to pay a large dividend to its new owner.)On the other hand, since the mid-1990s private-equity firms have taken every opportunity to stress thatthey do not depend on financial engineering—a technique that they say is now widely imitated by publiccompanies and thus no longer a source of advantage.
Instead, they prefer to draw attention to other waysin which they improve the firms they own.One is corporate governance. Unlike the owners of public companies, who tend to be too remote andthinly spread to spend time and money closely monitoring a business, private-equity firms have bigstakes. Because their people's careers are on the line, they have a powerful incentive to keep a close eyeon things.
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