Private Equity and Casino Capitalism
Brussels, 21 June 2007: Launching a new report â€œWhere the house always wins, Private Equity, Hedge Funds and the new Casino Capitalismâ€
Pension funds today provide more than 25% of private equity capital, but such highly leveraged investments are high-risk, donâ€™t necessarily generate better long-term returns than other investments, and frequently have negative impacts on employment, wages and working conditions. Managers of private equity firms, some of whom receive tens or even hundreds of millions of dollars in income each year, are also in many cases paying tax at rates well below ordinary workers.
â€œThe ITUC is advising pension trustees and managers to take extreme care with these casino funds. Contrary to the hype, they can bring substantial risks and in the long term many such funds have performed well below expectations. The real winners are the private equity and hedge fund managers â€“ while investors, and workers employed by companies targeted for leveraged buy-outs, have no such guarantees. The retirement incomes of millions of workers are at stake, and the future for these funds is much less rosy than they would have us believeâ€, said ITUC General Secretary Guy Ryder.
While some funds have been prepared to negotiate agreements with the unions which cover workers employed by take-over targets, the large majority of buy-outs provide no protection for employment levels, wages and working conditions. In one of several cases highlighted in the report, the private equity owners of KB Toys who had invested just US$ 18.1 million of their own money, used a â€˜dividend recapâ€™ to pay themselves and several company executives some US$ 120 million. Shortly after, the company filed for bankruptcy protection and nearly one-third of its workers lost their jobs.
â€œWith leveraged buy-outs reaching US$730 billion last year, the threat to short term stability and longer term sustainability in the global economy is real and cannot be ignored. It is just a matter of time until one of these massive transactions turns sour, and even a modest change in global economic conditions such as a significant rise in interest rates could lead to a cascade of collapsing deals, jeopardising hundreds of thousands of jobs worldwide. In addition to the dire consequences for workers, the macro-economic effects of this would be disastrousâ€ said Ken Georgetti, Chair of the ITUC Workersâ€™ Capital Committee and President of the Canadian Labour Congress. â€œThe secretive nature of these funds should give us all concernâ€, he added.
With Denmark estimating that it stands to lose 25% of its corporate tax revenues due to private equity and hedge fund activity if it takes no action, countries around the world are facing dramatic falls in already declining company tax income, posing new threats to public services and social protection. The report describes how, due to aggressive tax-minimisation schemes, taxpayers are in effect subsidising the activities of hedge funds and private equity, and thus the incomes of some of the worldâ€™s richest people.
â€œUntil regulators deal properly with the issues of transparency, regulation, taxation and protection for the victims of â€˜buy it, flip it, strip itâ€™ behaviour, pension funds should remain on high alert over unsustainable investments and avoid committing workersâ€™ retirement incomes to them, especially where private equity and hedge fund managers refuse to negotiate with unions and agree on protection for the employees of companies which are being bought-out. There are funds which have reached agreements with trade unions, and others should follow this positive exampleâ€, concluded Ryder.
Noting that any voluntary measures adopted by private equity and hedge funds are unlikely to solve the problem, the new ITUC report sets out a series of detailed recommendations for regulation of them:
Â Transparency; including reporting of assets by private equity, a harmonised international framework to cover hedge fund activities and reporting requirements for companies taken off stock markets into private hands;
Â Financial stability and risk; including limits on the levels of â€˜leverageâ€™ in transactions to reduce the risk of bankruptcy, increased oversight on private equity, and enhanced monitoring of the use of â€˜derivativesâ€™ by hedge funds;
Â Taxation; including limits on tax deductions for interest payments, removing the â€˜carried interestâ€™ tax loophole for fund managers, changes to rules concerning tax â€˜offshoringâ€™ and increased capital gains tax on short-term arbitrage deals;
Â Measures to protect public services and utilities from the possible negative effects of leveraged buy-outs;
Â Corporate governance; including stronger measures to prevent conflicts of interest and employee- and investor-safeguards, reform of voting rights in listed companies, and limitations on withdrawal of liquid assets, capital maintenance provisions, and requirements to report on the social impact of transactions; and,
Â Workersâ€™ rights; including information and consultation provisions, rules concerning continuity of employment entitlements when companies are sold, and enhanced frameworks to protect workersâ€™ rights and promote social dialogue to restrain the ruthless cost-cutting typical of leveraged buy-outs.