Last updated: Nov 2007
Unless you’re a reader of the business pages, Kohlberg Kravis Roberts (KKR) is probably not a familiar name to you. But Boots might be, or Toys R Us.
KKR is one of the world’s largest private equity firms, and that means that its environmental and social decisions affect millions of workers and consumers across the world. Sarah Irving investigates.
Private equity has, for a shadowy and complicated world, been grabbing headlines recently. With major high street brands and big employers such as EMI, Boots and the AA falling into the hands of private capital, trade unions and campaign groups are starting to look at these organisations and ask whether their impact spells boom or bust.
Private capital firms work by bringing together huge sums from various sources – bank loans, wealthy individuals or various types of investment fund – and using them to buy up companies. This might be by backing a management buyout of a firm, or by acquiring independent companies and placing representatives of the new owners on the board.
As KKR put it, private equity firms “acquire industry-leading companies and work with management to grow and improve them and thereby create shareholder value.”
Campaigners and trade unions have a rather different view of the process. KKR’s “growth, improvement and creation of shareholder value” is, to some, better known as asset-stripping – a process by which private equity firms target the most profitable sections of a business, selling them for a profit, and closing down any parts that won’t make big bucks.
Pay cuts and big bonuses
According to trade unions like the GMB, which has been actively campaigning against private equity takeovers, the effects of being taken private can be dire for workers. They cite cases such as Debenhams, which was re-floated after several years in private equity hands, but has issued a series of financial warnings and is struggling to pay off the huge debts its former owners accumulated.
The AA, meanwhile, has seen 3,000 jobs cut since it was bought out by Permira and CVC in 2004. Unions allege that staff morale and working conditions have plummeted and that management have tried to force a company-dominated union on staff. The GMB claims that equity bosses will make £350 million in profits when they sell the AA on.
What really irks unions and other campaigners against private equity in the UK is not just the prospect of job losses and cost cutting. It’s that this often goes hand in hand with massive bonuses for the partners in private equity companies, with very few partners paying much, if any, tax. According to financial commentators, only a small minority pay even the very low 5% rate that the current government demands of them.
And big slices of those untaxed bonuses come from massive loans, where banks which profit from the fees they charge private equity companies are happy to loan far more than in the past. This means that the companies bought up are saddled with big debts, and their workers and environmental commitments are likely to bear the cost.
Calls for transparency
The Walker Report, itself commissioned by the British Venture Capital Association (BVCA) as a result of attacks from MPs and campaigners, acknowledged that the industry needs reform. A consultation document intended to attract comments towards a voluntary code of conduct, its recommendations include:
- faster reporting of financial results (within four months of year end, instead of the current nine), interim reports, and more public information about the structure of the debt used in buyouts;
- more transparency over the identities and roles of directors and executives, and the appointment of external directors (though not necessarily independent ones);
- a report by the chairman or chief executive on the company’s values and approach to its staff and the wider community.
But campaigners have criticised the proposals for failing to address the issue of huge payments to directors and partners, and for ignoring environmental and social impacts, while at the other end of the spectrum the BVCA has insisted that private equity companies shouldn’t be expected to be any more open and transparent than other privately-held firms, such as those owned by families.
“Privately owned and socially responsible”
Since KKR took over Boots in June 2007, it has taken care to promote itself as a socially responsible owner, with phrases like ‘privately owned and socially responsible’ appearing in press releases and on company website Boots.com.
KKR also apparently bucked the trend of environmentally oblivious private equity companies earlier in the year, when it formed part of a consortium which took over US energy giant TXU. TXU planned to build a string of coal-fired power stations, which would have pumped out huge volumes of climate change emissions and other pollutants. Environmentalists made it the subject of a global campaign, and asked citizens of the USA and beyond to write to several dozen international finance companies who had been approached by TXU to bankroll its plans.
The surprise takeover of TXU by KKR and fellow venture capitalists Texas Pacific Group was accompanied by the even more surprising announcement that the firms would be cutting TXU’s proposed power station scheme from 11 to 3, as well as investing in alternative energy sources and improved efficiency measures and the creation of a Sustainable Energy Advisory Board.
While the TXU announcement was broadly welcomed by environmentalists in the USA, the Sierra Club pointed out that the 3 remaining plants were amongst the worst of those proposed.7 And Friends of the Earth expressed concern that the shortfall in generating capacity might instead be met with new nuclear power plants.
Or growth at all costs?
Other private equity groups, however, have engaged in less positive PR than Kohlberg Kravis Roberts, and perhaps give a more realistic picture of attitudes in the sector.
Giving evidence before a Treasury select committee, a leading member of CVC, alongside heads of Blackstone and other major private equity firms, attacked companies which focus on environmental and social issues, saying that “a lot of public companies we speak to spent too much time on regulatory issues, social responsibility and corporate governance, and they forget their prime purpose – which is to grow the company as rapidly as possible.”
Ethical Consumer’s own experience of dealing with private equity companies while researching its reports has turned up similar sentiments, with Lion Capital responding to enquiries by saying that it “was not responsible” for the environmental performance of companies it owned.
Major private equity players such as Philip Green of Arcadia (which owns Top Shop) have repeatedly refused to seriously engage with ethical debates or to produce environmental or social reports, while one of the first acts of the Barclay brothers on taking over Littlewoods was to withdraw from the Ethical Trading Initiative and disband the corporate social responsibility department.
And repeated requests to both KKR and the BVCA for comments for this article, by phone and email, have been met with silence. Given that KKR’s other investments include involvement in high-impact industries like mining, engineering and pharmaceuticals, as well as areas such as retail where workers’ rights or sourcing is an issue, the depth of its commitment to creating real change in the private equity industry has to remain under question.
1 Boots.com press release, 26th June 2007
2 KKR press release 26th February 2007
3 ‘Private equity’s wedge,’ bbc.co.uk 20th June 2007
4 GMB campaign leaflet, 2007 and www.gmb.org.uk, July 2007
5 Ethical Corporation magazine, editor’s blog 4th July 2007
From Ethical Consumer, Issue 109, November/December 2007