By selling off unwanted assets, the private equity asset-strippers are doing society a service. So why do they deny it?
The spotlight is on private equity again, as the Treasury Select Committee began its investigations into the industry on Tuesday. While the Committee's emphasis appears to be on tax and transparency, one of the main criticisms of private equity has been its alleged penchant for asset-stripping. (This is where a new owner of a business quickly sells off assets such as land or a factory.)
What I find interesting is that asset stripping is seen as a criticism -- consider the usual terminology: 'accusations of asset-stripping'. This is the common parlance of union leaders, but even Northern Ireland Secretary Peter Hain has joined the chorus, suggesting that asset-stripping should somehow be curtailed.
Bizarrely, the buy-out industry seems to accept the premise that asset-stripping is a bad thing, and repeatedly attempts to play down the practice, rather than defending it as an essential contributor to a healthy economy. In a defence of private equity, the ICAEW's head of corporate finance flat-out denied that they were asset strippers, but amusingly did go on to say that "there is a need on occasions to downsize the workforce and sell off assets". The BVCA's Why private equity is good for the UK statement makes no reference to the sale of assets.
Why should a company tie up capital in assets that it doesn't need: land, buildings, intellectual property or business units? If another business is willing to pay more for them than they're worth to you, why would you want to keep them? And if that other business is willing to pay more for them, then it's because they believe they can make better use of them, often through cost savings or synergies with their existing operations.
When assets change hands, they don't just disappear; both the seller and the buyer expect to gain from the transaction. And if the resultant cash is not required in the business, the owners can re-invest it elsewhere.
This ability to reallocate assets to where they can be used most effectively (i.e. to where they can generate the highest return) is a cornerstone of economic development. For a cabinet minister to suggest that this should be restricted is astounding, and I am amazed that private equity has been so reluctant to fight its corner on this issue.
Expect to hear more concerns about asset-stripping now that Jaguar and Land Rover are up for sale, and ask yourself if the accusers have thought the question through, and whether they might have another agenda. Perhaps highlighting the fact of rich people getting richer might foment a return to the left-right politics of previous decades?
I'm not suggesting that private equity is without fault, but its asset-stripping should be applauded and encouraged.
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