Shareholders in public companies are losing their grip on companies, as more and more of the economy is gobbled up by private equity investors, accountable to few. Roger Cowe argues it’s time for socially responsible private equity.
There is no sign of an end to the long-running debate among investors who want to influence companies about the relative merits of ‘companies of the future’, ‘best-in-class’ or ‘engagement’. But the debate seems to be becoming more irrelevant as less and less of the economy is actually controlled by conventional shareholders.
The meteoric rise of hedge funds means that these ultra short-termists are grabbing a fast-growing slice of public company shares. Current predictions suggest the number of hedge funds around the world will surpass 10,000 next year, and their investment funds will reach 61,200bn. Already they are believed to account for half of daily stock market turnover.
At the same time, the private equity boom means that public companies are in any case responsible for a declining proportion of economic activity. Woolworths is the latest long-established business to be targeted by private buyers, following a lengthy line of retailers such as Debenhams, Bhs, Arcadia and Wickes. Private equity now owns companies employing almost one in five of the private sector workforce – nearly three million people. Last year was actually the first since 1997 that private equity firms floated more companies on the stock market than they took private. But the value of companies going private remained at the same high level – £3.5bn.
The result of these twin trends is that conventional shareholder activism, in whatever form, can have less impact on the companies that affect our lives, either because those companies no longer have public shareholders or because the fund managers who are applying pressure speak for fewer shares.
The hedge fund phenomenon highlights the rather fragile nature of the shareholder ownership concept. As one major public company chief executive worried recently: “I have no idea who owns us.”
“These market players are traders. They are not interested in ownership. Indeed, they’re not terribly interested in the companies whose shares they are trading. The shares are simply financial instruments, just like currency futures, treasury bonds or carbon credits”.
Private equity is a different matter. The timescales are still relatively short, in the sense that the investors ideally want an exit in two or three years. But there is no doubt about ownership. And while the focus is tightly financial, there is no reason why this has to remain so. Much of the money invested in private equity funds comes from institutions which embrace shareholder activism in their conventional equity funds. In that case they should apply the same social and environmental responsibility criteria to their venture capital investments. That might sit rather uncomfortably with the relentless financial focus, but the argument is the same as fund managers worrying about their financial returns.
The private equity industry is already beginning to respond to questions about governance and transparency. Perhaps it is also time for socially responsible private equity.
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