Private equity funds risk destabilising poor countries: UNCTAD

Taken from Yahoo News, Tuesday, October 16
By William French, AFP

Private equity funds are an increasing force among global investors but their short-term approach risks destabilising some developing countries, the United Nations trade and development agency said on Tuesday.

Private equity funds were involved in 889 merger and acquisition deals in 2006, some 18 percent of the global total and worth a record 158 billion dollars (111 billion euros), the UN Conference on Trade and Development (UNCTAD) said in its "World Investment Report 2007."

Overall, global foreign direct investment (FDI) reached 1,306 billion dollars in 2006, up 38 percent and close to the record 1,411 billion dollars set in 2000.

Investment growth occurred across all regions of the global economy, from developed countries to the developing world and the "transition" economies of Southeast Europe and the former Soviet Union, the report said.

Mergers and acquisitions remained the driving force behind FDI and private equity's growing role in this field merits serious study given its different investment strategy, UNCTAD said.

"We need to understand the role and the behaviour of the private equity funds more," UNCTAD director general Supachai Panitchpakdi told journalists.

"To me, they do not look like long-term investors," he said.

Private equity groups specialise in raising cash from private investors and banks, which they then use to buy underperforming publically listed companies, which are taken private, restructured and re-sold, often at great profit.

Britain and North America are the most important regions for fundraising and investments by private equity firms but continental Europe and Asia are gaining ground, the UNCTAD report said.

The largest private equity takeover to date is the 45 billion dollar purchase of Texas utility TXU by a consortium including Kohlberg Kravis Roberts, Texas Pacific Group and major Wall Street banks including Goldman Sachs.

"Private equity funds have typically shorter time horizons than public companies engaged in buyouts as they are inclined to look for options that offer quick returns," the UNCTAD report said.

Supachai warned that the short-term investment strategy inherent in private equity deals "can sometimes destabilise countries if they are overly dependent on these equity funds.

"They dismantle companies and sell plants ... unlike the kind of greenfield investment we like to see," he added.

"Greenfield" investments are projects such as new power plants or factories constructed from scratch.

UNCTAD said that growing competition in the private equity market and the soaring cost of investments casts some doubts as to the sustainability of the high level of their FDI activity.

Private equity funds have long been criticised by trade unions and left-wing politicians for so-called "asset stripping" and a cavalier attitude towards the workers in companies they acquire.

Two years ago, Germany's Social Democrat party chief Franz Muentefering, currently the government's labour minister, famously likened the investment funds to "locusts" for allegedly stripping companies of their most valuable assets and then moving on.

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It is true that Private equity firms are nothing but asset strippers. Their main aim is to make money in the short run. Unfortunately that is the life we live today, everybody looking after themselves and not others as a famous economist once said... in the long run we are all dead!