KEY POINTS:
Should private-equity firms be forced to open their books to public scrutiny?
The idea might sound preposterous, but a former Kiwi academic believes they should.
Dr Sue Newberry, now an associate professor of accountancy at the University of Sydney, argues that it is sometimes everyone's business what a
business does. And it shouldn't be forgotten, she says, that private companies have the privilege of legal incorporation, which allows them to take risks without necessarily having to take personal responsibility if it all goes wrong.
The quid pro quo, she believes, is that they have an obligation to be transparent about their financial health, especially now that some of them are important players in the commercial world, with operations that are integral to the way society operates (in areas such as aged care and childcare, for example).
"The whole idea that there's not public ownership in the shares - that's stupid. Especially when you think about the private-equity model, which uses predominantly debt, and they don't have much actual money of their own put up, and they're aiming to make their profits by buying up other operations, loading them up with debt, and taking out their money. In some ways it's almost like theft."
If private companies go bust then it is often the public that is left to sort out the mess - such as the recent rash of government bailouts - she argues.
There is indeed talk among officials of public accounting requirements for private companies, but Newberry fears it will be a lesser standard than is required from listed companies.
"I think private-equity firms serve a purpose, but I question the idea they should be private just because they're not listed on the sharemarket."
Of course, publishing its accounts does not guarantee that a listed company won't go bust. But that is a whole other issue, related to the debate over audits and international accounting standards, says Newberry.
Locally there has been little public debate over issues like private-equity involvement in important institutions such as the media.
In a forthcoming book that considers news media ownership in this country, former Herald editor-in-chief Gavin Ellis argues that we need to consider the issue.
Ellis admits the tendency of private-equity players to be short-term investors makes him nervous, although he acknowledges that doesn't necessarily make them any worse than any other owner - and it can even be an advantage. "Interestingly, you can't really say that one form of ownership has treated their journalists better than another because the state sector had a very heavy cut to their newsroom, and both newspaper groups have cut their news staff."
But he notes that in countries such as Britain, rigorous levels of financial disclosure are required in order to retain a broadcasting licence.
He also believes the media is open to charges of hypocrisy if it demands financial accountability from others but doesn't open up its own books.
Unions have been arguing for years that private equity has become such a large commercial player that the public deserves more transparency. Among other things, unions worldwide have been promoting global corporate responsibility principles for private-equity firms.
Regulators, in their painfully slow manner, have begun taking an interest. In the US, the Department of Justice and the Federal Trade Commission have been looking into merger issues, and what are known as "club deals", when private-equity players get together to jointly buy assets. The move has prompted local lawyers to question whether our Commerce Commission might also take more of an interest in private-equity deals.
Securities Commission chairwoman Jane Diplock has also raised concerns about private equity.
In a speech to the Institute of Actuaries of Australasia in September 2007, Diplock pointed out that private equity had traditionally invested in new ventures that were less attractive to other forms of capital. But in recent years the tidal wave of private-equity buying into public companies, and those previously destined for public listing, had prompted international securities bodies to consider a regulatory response.
"We do not know enough about the implications of having this large and somewhat opaque sector on the fringe of public markets, and sometimes slap in the middle. I think there may be transparency-related issues at various points of private-public intersection," she said.
New Zealand already has bitter experience of what can go wrong when public and private-equity markets meet, with the Feltex fiasco being just one example. The Securities Commission also criticised the offer documents associated with the Vertex float.
Diplock noted in her speech that Australia's Reserve Bank Governor, Glenn Stevens, had warned that the extensive use of debt by private-equity firms could cause possible problems in the financial system. Debate here, she acknowledged, was more muted.
Many private-equity firms have since met their critics with voluntary proposals for greater disclosure. But do our own regulators think that is sufficient?
Friday Business asked the Commerce Commission and the Securities Commission to comment. Both organisations said they had nothing to say on the matter.
