30 Jul, 2007

Private Equity Firms Face Image Problems, Transparency Pressure

Imtiaz Muqbil

Seeking to counter a growing image problem and reputation as predatory buyout “asset-strippers”, private equity companies are trying to work out voluntary guidelines to provide more “disclosure and transparency” about themselves and their mega-billion dollar deals.

In this dispatch:

1. PRIVATE EQUITY UNDER TRANSPARENCY PRESSURE: Seeking to counter a growing image problem and reputation as predatory buyout “asset-strippers”, private equity companies are trying to work out voluntary guidelines to provide more “disclosure and transparency” about themselves and their mega-billion dollar deals.

2. ASIA-PACIFIC NATIONS DISCUSS IMPACT OF AGEING POPULATIONS: A UN-backed meeting held in Bangkok last week discussed the social, health and economic consequences of population ageing, set to become one of the greatest challenges in the coming decades as the proportion of persons aged 60 years and over in the world will double between 2000 and 2050.

3. U.S. WARS COSTING $12 BILLION A MONTH: The boost in troop levels in Iraq has increased the cost of war there and in Afghanistan to $12 billion a month, and the total for Iraq alone is nearing a half-trillion dollars, according to a U.S. congressional report obtained by the Associated Press.

4. PLANES, TRAINS AND AUTOMOBILES – IBM REVEALS FIVE TRANSPORTATION INNOVATIONS: IBM announced five innovations that have the potential to change the way people travel. The list is based on market and societal trends expected to transform our lives, as well as emerging technologies from IBM’s labs around the world.

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1. PRIVATE EQUITY UNDER PRESSURE TO EXPAND TRANSPARENCY

Seeking to counter a growing image problem and reputation as predatory buyout “asset-strippers”, private equity companies are trying to work out voluntary guidelines to provide more “disclosure and transparency” about themselves and their mega-billion dollar deals. Declaring that “private equity needs to become more open,” a preliminary review of public disclosure requirements has been conducted “on request” from the British Venture Capital Association and posted on the website of the consultant www.walkerworkinggroup.com to invite public comment.

Designed to deflect more public criticism, media controversy and government regulation, the review has set 9 October as the deadline for responses. The preliminary review has so far been an internal affair; most of the people on the consultant’s “advisory committee” and those from whom comments have been sought thus far are within the private equity sector itself.

The recent US$ 26 billion buyout of the Hilton Corporation by the Blackstone Group is one indication of how private equity companies are growing their stake in hotels, airlines and tour operators. Blackstone also owns Travelport, Centerparcs, Extended Stay America and numerous other theme parks and hotel franchising companies worth billions of dollars. While private equity companies claim these buyouts are designed to enhance the acquired company’s performance and grow its business, global trades unions accuse them of being “asset-strippers” who will “strip and flip” the companies.

The review in the UK seeks to “promote materially greater visibility of private equity, but without eroding its capacity to act as a positive agent of economic change and as a contributor to the UK economy through the concentration of significant cross-border private equity activity in London.”

It says that the importance of private equity has been “inadequately explained, and its role and the ingredients in its success are not well understood. This is partly the result of the understandable tendency of many in the industry, who chose not to be in the public eye of the listed sector, to say that ‘private means private’ and to be attentive to confidentiality to the point of secretiveness. It is also the result of very rapid recent growth in a highly competitive industry, which has left many of the main industry participants focussing on winning deals and implementing business strategies in the companies they acquire with little attention to the wider context.”

As a result, it says, it is important to find ways “to reduce the palpable visibility gap and the wider public suspicion of private equity that has come to be associated with it. Private equity enjoys rights of ownership which, in particular given their massive scale, must now be complemented by matching obligations.”

The review suggests several transparency and disclosure actions that can be taken by three separate but related groups: private equity portfolio companies, the general partners who manage private equity funds and the representative industry association. These range from filing of the annual report and financial statements on a company website within 4 months of the year-end to listing a detailed composition of the board, indicating separately executives of the company, board members who are executives of the general partner or fund and directors brought in from outside to add relevant industry or other experience.

The “financial reporting should cover balance sheet management, including links to the financial statements to describe the level, structure and conditionality of debt,” the review says. One key recommendation is for the buyout firms to “provide a broad indication of the performance record of their funds, with an attribution analysis to indicate how much of the value enhancement achieved on realisation and in the unrealised portfolio flows from financial structuring, from growth in the earnings multiple in the market in the industry sector, and from their strategic and operational management of the business.”

Because the buyouts also attract huge media interest, the review notes that “private equity firms will be expected to be more accessible to specific enquiries from the media and more widely. It adds, “Confidentiality concerns will constrain responses that can be given in some situations, but the line between openness and secretiveness should be drawn with much greater flexibility than hitherto, especially in respect of large transactions which, in the listed sector, would attract very full public presentation.”

Considerable responsibility is also placed on the private equity industry association which is called upon to collect and disseminate date on an authoritative industry-wide basis, covering areas such as scale of funds raised, categorisation of limited partners by type and geography, and scale of existing private equity portfolios and of recent buyout activity.

The association is also asked to provide “estimates of levels and changes in employment and new capital investment by portfolio companies,” estimates of aggregate fee payments by private equity management companies and by portfolio companies to other financial institutions and for legal, accounting, audit and other advisory services, and more. The review notes that all this is the best interests of the equity industry itself. It quotes this piece of advice given to the UK Treasury Select Committee, “Private equity is more likely to prosper if the industry has a positive image which will encourage others to invest and deal with it and will not cause alarm to employees, trade unions, suppliers, customers, regulators or legislators”.

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2. ASIA-PACIFIC NATIONS DISCUSS IMPACT OF AGEING POPULATIONS

A United Nations-backed meeting on the social, health and economic consequences of population ageing was held last week in Bangkok. The two-day seminar was held by the UN Economic and Social Commission for Asia and the Pacific in collaboration with the UN Population Fund and the UN Department of Economic and Social Affairs.

According to a meeting report, “Population ageing is poised to become one of the greatest challenges in the coming decades with vast economic, social and other consequences. the proportion of persons aged 60 years and over in the world will double between 2000 and 2050, from 10 to 21 per cent. Among the world’s older population, 52 per cent lived in Asia and the Pacific in 2002 and this is projected to increase to 59 per cent in 2025. The region is the fastest ageing region of the world. Due to declining fertility and increasing longevity, the number of older persons in the Asia-Pacific is expected to surge from 410 million in 2007 to 733 million in 2025 to an expected 1.3 billion in 2050.

Such shifts in proportions will have tremendous social and economic impacts on income security, social welfare and medical services, the report says. Family life will be reshaped as there will be fewer caregivers to attend to older people’s needs since the number of younger people is declining and the number of working women is increasing. Also, migration to urban areas is leaving many older persons behind in rural areas. There will also be socio-economic and health consequences, with changing family structures and their impact on the provision of care and support for older persons.

According to the report, population ageing as well as smaller family size and lower population growth rates as a result of rapid declines in fertility and mortality will challenge several countries in the Asia-Pacific. Mortality reduction will continue to be an overriding policy goal, which would further enhance the ageing process. As a result, the number of older persons in the region is increasing at the rate twice as high as the growth rate of the total population. Furthermore, as the region is inhabited by over 60 per cent of the global population, the absolute size of older population is a major concern. The social, economic and health implications of this absolute size of older persons are so profound and far-reaching that improving living conditions and providing income security, social welfare and medical services to older persons are some of the major challenges faced by many countries in the region.

Family life has also undergone a profound transformation in South, South-East and East Asia. Family structures have changed because of modernisation, including industrialisation and urbanisation that encompassed a majority of society in the region. As a result, family size shrank as a function of decreased fertility, delayed marriages, and increased divorce rates. At the same time life expectancy increased due to advances in medical technology, improved access to quality reproductive health services, wider vaccination coverage, improved hygiene and nutrition standards as well as increased access to safe water. Changes in family structure combined with demographic ageing resulted in formidable challenges in the provision of care for older persons, usually provided by the younger family members.

Many countries in the region do not have sufficient national social security for older persons. Families continue to provide support to older people and in many societies of the region, the tradition of older persons co-residing with their family members is generally the norm. However, traditional means of family support are steadily eroding in most societies. As health-care infrastructure is already weak in many countries of the region, the additional burden of caring for older persons will further stretch it.

The rising number of older persons on the one hand, and the declining number of the younger population on the other will mean that there will be a shortage of caregivers for the older population. With an increasing number of younger women entering the labour force, often away from home, the availability of caregivers for older persons is also decreasing. With rapid urbanisation, globalisation and migration experienced by many countries in the region, the situation is further worsening, leading to many older persons being left in the rural areas without caregivers.

The travel & tourism implications of this demographic change are quite phenomenal. Even though new markets will emerge, significant changes will be required in services and facilities to cater to them as well as in marketing strategies. It will also mean changes in corporate human resources management, including retirement age, pension funds, etc. For trainers and academics, a whole new field of research will emerge.

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3. U.S. WARS COSTING $12 BILLION A MONTH

WASHINGTON July 9, 2007 (AP) — The boost in troop levels in Iraq has increased the cost of war there and in Afghanistan to $12 billion a month, and the total for Iraq alone is nearing a half-trillion dollars, congressional analysts were quoted as saying in an Associated Press report. All told, Congress has appropriated $610 billion in war-related money since the Sept. 11, 2001, terror assaults, roughly the same as the war in Vietnam. Iraq alone has cost $450 billion.

The figures come from the nonpartisan Congressional Research Service, which provides research and analysis to lawmakers. For the 2007 budget year, CRS says, the $166 billion appropriated to the Pentagon represents a 40 percent increase over 2006.The Vietnam War, after accounting for inflation, cost taxpayers $650 billion, according to separate CRS estimates quoted by the AP.

The $12 billion a month ”burn rate” includes $10 billion for Iraq and almost $2 billion for Afghanistan, plus other minor costs. That’s higher than Pentagon estimates earlier this year of $10 billion a month for both operations. Two years ago, the average monthly cost was about $8 billion.

Among the reasons for the higher costs is the cost of repairing and replacing equipment worn out in harsh conditions or destroyed in combat. But the estimates call into question the Pentagon’s estimate that the increase in troop strength and intensifying pace of operations in Baghdad and Anbar province would cost only $5.6 billion through the end of September.

If Congress approves President Bush’s pending request for another $147 billion for the budget year starting Oct. 1, the total bill for the war on terror since Sept. 11 would reach more than three-fourths of a trillion dollars, with appropriations for Iraq reaching $567 billion. Also, if the increase in war tempo continues beyond September, the Pentagon’s request ”would presumably be inadequate,” CRS said.

The latest estimates come as support for the war in Iraq among Bush’s GOP allies in Congress is beginning to erode. A battle over funding the war will resume in September, when Democrats in Congress begin work on a funding bill for the war. Congress approved $99 billion in war funding in May after a protracted battle and a Bush veto of an earlier measure over Democrats’ attempt to set a timeline for withdrawing U.S. combat troops from Iraq.

According to the AP, the report faults the Pentagon for using the Iraq war as a pretext for boosting the Pentagon’s non-war budget by costs such as procurement, increasing the size of the military and procurement of replacement aircraft as war-related items.

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4. PLANES, TRAINS AND AUTOMOBILES – IBM REVEALS FIVE TRANSPORTATION INNOVATIONS

ARMONK, NY – 27 Jul 2007: IBM today announced five innovations that have the potential to change the way people travel. The list is based on market and societal trends expected to transform our lives, as well as emerging technologies from IBM’s labs around the world that could make these innovations possible. Every year, nine billion gallons of fuel are wasted in traffic congestion, auto accidents cost hundreds of billions of dollars and by 2020 the number of airline passengers is expected to double, soaring to an annual rate of more than seven billion worldwide. In the next two years, these statistics will change through technology innovations in the following ways:

<> Our cars will be able to sense other cars and avoid hazardous road conditions. The future is collaborative driving. Cars in the near future will have driver-assist technologies that will make it possible for automobiles to behave as if they have ‘reflexes.’ Vehicles will exchange information with each other and with the road infrastructure, take corrective action where appropriate, and provide essential feedback to the drivers. Highway and city merging and traffic flow will be smoother and safer and harmful emissions will be reduced.

<> Travellers will get notifications of train and bus delays via cell phone. In the near future a new technology will call or text message riders to alert them when the next bus or train is due to arrive. Using sensors, GPS technology and in-vehicle communications, an innovative transport system will send notifications of train and bus delays, or if an alternative route will be faster or more convenient. The same systems will allow schedulers to make real-time route corrections, making “bus bunching” a thing of the past.

<> Drivers will converse with their cars. Increasingly sophisticated voice recognition systems will allow drivers to get real-time flight updates, read and respond to emails, get directions, avoid accidents, play DVDs or select music through simple, conversational voice commands. Voice recognition navigation and entertainment systems also will allow drivers to adjust cabin temperature or call home while keeping hands on the wheel and eyes on the road.

<> Cities will find the cure for congestion. Intelligent traffic systems will make real-time adjustments to traffic lights to ease congestion and clear paths for emergency vehicles. New sensor technologies, GPS and satellites will provide info to motorists on the best routes to avoid driving and parking during peak busy hours. Fewer traffic jams will result in cleaner air and safer roads.

<> Travellers will gain control over route changes and get a better handle on lost luggage. The location of jets, crews and airport gates will be optimised as a smart system “foresees” delays and re-routes passengers before they get stranded at the airport. Kiosks will give travelers control over route changes and a unified airline/airport system will enhance security while dramatically cutting baggage handling errors.

“Transportation researchers and strategists at IBM are concerned that the cure for transportation problems is not building more roads or adding flights,” said Marty Salfen, general manager, global travel and transportation, IBM. “IBM thinks emerging technologies — especially in communications — will make travel safer, more streamlined and able to accommodate ever-increasing growth demands.”