The.Economist.2007-02-10 (966424), страница 4
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Add some generous helpings of debt, a few spoonfuls ofmanagement incentives and trim all the fat. Leave to cook for five years and you have a feast of profits.That has been the recipe for private-equity groups during the past 20 years.Private equity has been so successful that it is getting ever bigger and bolder (see article). Rarely a daygoes by without some new multi-billion-dollar scheme. On the table now are J. Sainsbury, a Britishretailer, and Equity Office Properties Trust, an American property group—which, valued at some $40billion, would be the biggest deal ever.Rampant expansion has won private-equity groups plenty of enemies.
In 2005 Franz Münterfering, aGerman politician, described them as “locusts”, intent on sacking workers and making a quick euro. Morerecently, Philip Jennings, the general secretary of the UNI trade union, summarised the industry'sphilosophy as “buy it, strip it and flip it”. Some fret about the growing tendency for private-equity groupsto club together to bid for large companies—is that anti-competitive behaviour or simply a wise effort tospread risk? Others complain about the conflicts of interest in management buy-outs. Might notexecutives with inside knowledge help a private-equity group buy their company cheaply so as to makemore money years later when it is eventually sold on?Some of this fuss reflects the culture shock in countries suddenly facing the full rigours of AngloAmerican capitalism. To the extent that private-equity groups release capital from unprofitable firms andsupply it to thriving ones, so much the better.
Private equity arguably represents an improvement on late20th-century governance, when management and ownership were strictly separated. By contrast,private-equity groups keep a close interest in the companies they own, while executives benefit from thediscipline of incentives and a high debt burden, which stops them wasting cash.Because the ultimate buyers want a company with prospects, private-equity groups tend not to trash thebusinesses they back. Research by American academics has found that companies refloated on thestockmarket after private ownership performed better than other new issues did.
Club deals are lessabout collusion than about pursuing quarry that a single fund would have trouble swallowing. Andalthough in theory the danger exists that managers may collude with private-equity purchasers to cheatshareholders out of a fair price, in practice buyers seem more at risk of paying too much.The other PE ratioThe people who should really be concerned about the private-equity boom are rarely mentioned:investors. The rush into private equity is part of a drive into “alternative” assets (a category that alsoincludes hedge funds, property and commodities) and away from shares and government bonds.
Butprivate-equity returns are not really very “alternative”, since the forces that drive them also drive thestockmarket. As the manager of a traditional fund puts it: “I fail to understand why it's a good idea forclients to take money away from me and give it to private-equity groups who charge higher fees forbuying quoted shares at a 20% premium.”Studies suggest that investors have so far done well out of private equity, with the average buy-out fundbeating the S&P 500 index in 1980-2001.
But these figures come with a large health warning. First, the1980s and 1990s saw generally falling interest rates and rising share prices—the ideal background forprivate equity to succeed. Second, the modern private-equity industry is built on a far greater scale thana decade ago.In 1991 just 57 funds jostled for deals, according to Private Equity Intelligence, a research firm; by theend of last year, 686 were in the chase.
The $430 billion private-equity funds raised was more than theindustry drummed up between 1990 and 1998. As more money piles into the business, groups could losetheir focus, and competition could push up the prices for deals and force down future returns. Indeed,research shows that the more money is raised by private-equity funds in any year, the lower returns tendto be. The last peak for fund-raising was 2000, the year of the dotcom crash.And there is a sting in the tail. A small number of private-equity groups consistently earn above-averagereturns, whereas the rest do far less well.
New investors may be unable to gain access to the top groupsand end up funding the laggards. If the benign conditions of the 1980s and 1990s are not repeated,those investors could be sorely disappointed.Copyright © 2007 The Economist Newspaper and The Economist Group. All rights reserved.About sponsorshipBird flu and public healthUnder the influenceFeb 8th 2007From The Economist print editionBe concerned about avian influenza, but for the right reasonsAFPGet article backgroundTHE British press does love a good panic. It did its best to stir one up over the weekend after someturkeys on a farm in the east of the country contracted influenza of the dreaded H5N1 strain, and ittranspired that 160,000 birds were going to have to be killed and cremated in order to stop the diseasespreading (see article).
Questions were asked about whether the government had reacted too slowly inimposing a quarantine zone around the infected farm (no doubt the opposite questions would have beenasked had such a zone been imposed as the result of a false alarm). Grave advice was dispensed onwhether or not turkey meat was still safe to eat (it is). But most of all, everyone worried about theimplications for human health of what is—though it has indeed claimed some human victims—stillbasically a bird disease.Don't panicThat worrying matters—not because there is no risk to human health (there is, but it is small andrestricted to those who come into close contact with infected birds), but because such panics risk doingtwo opposing things. One is that they act as “social vaccines”, inuring public opinion to the need forvigilance. The other is that they focus anxiety on the particular, when it is the general that needsattention.Avian influenza H5N1 was first identified in 1997 when there was a huge outbreak in Hong Kong.
Afterthat shaky start, the world has responded fairly well to the risk of this particular virus mutating in a waythat would allow it to pass from person to person rather than merely from bird to person. Drugs that actagainst a range of influenza viruses are being stockpiled for rapid deployment. The planet's vaccinemaking infrastructure is about to be overhauled to allow billions of doses, rather than mere millions, tobe churned out—and much of the new capacity will be built in poor countries.
In some places, at least,ruthless monitoring of poultry flocks has reduced both the avian disease and the (already rare) cases ofpeople becoming infected.When it comes to the monitoring, there are some unlikely heroes. Vietnam's frightening bureaucracy hasbeen deployed so effectively that no human case of avian flu has been seen in the past year—thoughChina, in the past, used its own bureaucracy to cover the disease up. Identifying human cases andisolating them quickly is important because the shortest route to a version of the disease that isdangerous to the whole of humanity rather than just vets and poultry farmers is simultaneous infectionwith both bird influenza and the human variety, and the exchange of genes between the two.
This couldcreate a form of the disease that has the virulence of the avian infection, but which passes from personto person with the ease of the human one.However nasty influenza is, though (and it can be very nasty indeed), it is what Donald Rumsfeld wouldcall a known unknown. Drugs can be deployed; vaccines developed; victims quarantined. What shouldreally worry policymakers is the unknown unknowns.That animal diseases jump the species barrier from time to time is well understood. AIDS, for example, iscaused by a chimpanzee virus that made the leap around 1930, whereas severe acute respiratorysyndrome (SARS) came from either bats or civets in 2002. But no one knows which disease will be next,what animal will be its natural host, where it will happen, or how dangerous it will be.In the face of that uncertainty, the most important thing is to have monitoring systems in place that areable to pick up unusual symptoms—any unusual symptoms.
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