Private Equity piling debt on businesses and boardroom quotas

>> Click here to read Lisa’s story “Private Equity – Companies behind glitzy deals funded by cheap debt are heading for collapse”

>> Read about banking giant HSBC’s new initiative to encourage women to reach the top.

Cynical or stupid. There is really no other explanation for the way in which most private equity companies have behaved.

Sure, businesses fail in recession. But to send them into a downturn with one arm tied behind their back in the form of crippling debt interest payments is unforgivable. and now private equity-backed companies are falling like ninepins.

As we saw during the crazy dotcom boom, when companies pretended there was no longer a need to make profits so long as sales kept growing, turning a blind eye to the realities of basic finance is doomed.

The private equity passion for loading companies they bought with debt in the belief it would be repaid when they sold for ever-increasing prices was cuckoo.

Homeowners might hope that house prices rise forever. The gurus of private finance should know better. They let themselves borrow to pay fancier and fancier prices for companies, not considering that asset prices might fall.

While taking huge fees and pretending to wave a management magic wand, they simply cut costs by sacking people and refusing to invest in the future of the business. Decent companies were bled dry by interest payments on huge debt.

Now, as the usual exits of finding equally stupid buyers or a willing stock market to float businesses on aren’t available, they are locked in with crippling debts. The banks might stay their hands as they don’t want to realise losses on loans, but it won’t last forever.

Already, second time round, private equity groups are circling to pick up the spoils at knockdown prices. at least three buyout investors are trying to raise £5 billion to buy distressed assets. as ever, it is the little people who pay. Jobs were cut trying to repay debt. More will go as these companies change hands on the brink of bankruptcy.

With the Government urging small business to come to the rescue, now should be the moment for creative investment in growing business. But private equity is tainted. it is a spent force apparently interested only in lining its pockets rather than helping business prosper.

Dreaming away while I listened to a Dvorjak symphony at London’s Royal Festival Hall last week, it struck me that at least 40 per cent of the orchestra were women. A top orchestra. And not just in the back desks – five of the eight leaders were female.

So how can a premier outfit in one section of society do so much better in terms of having senior women than another? As business struggles to get close to 10 per cent representation of women anywhere near the top jobs, why can an orchestra do so much better?

The obvious conclusion – given that orchestras keep inhospitable hours and undertake serious overseas travel giving the lie to the usual bunkum that women won’t work outside school hours – is that there is an absolute standard of ability and tested against that women are every bit as good as
men.

In the City, women have prospered in fund management where investment results speak for themselves rather than the hours sat at a desk instead of taking off the odd hour taken for sports day with the kids.

Attempts to improve the representation of women are increasing – probably helped by Harriet Harman’s barb that the financial crisis would not have happened had women been in charge of the big banks.

Royal Bank of Scotland, for example, has a programme to encourage female staff to make it to the top and as my colleague Vicki Owen reports (elsewhere on the site) banking giant HSBC is launching an initiative to encourage women to reach the top not only in its own walls but throughout industry.

Still, though, I worry that much will not change without a degree of force. Set aside jokes about Sheilas and the condescendingly sexist gasps that accompanied the election of a female prime minister, Australia , it appears, is actually becoming a bit of a beacon in the global struggle to
improve the representation of women at the top of business.

In a world where Australia is easily stereotyped as the land of lager, surfing and sheepshearing where the little woman indoors would find taxing anything much more complicated than preparing ‘the barbie’, a potential breakthrough appears underway.

About 18 months back, the Australian Stock Exchange made it a listing requirement for companies to publish the numbers of senior women in their organisations.

This was not the draconian quota system adopted by Norway but something closer in spirit to Britain’s Combined Code where disclosure invites those falling below acceptable standards to be shamed.

According to Kate O’Reilly(*), whose company, Optimiss advises the Australian finance sector on hiring and retaining women and which specialises in women only recruitment, there has already been a sharp rise in the number of women boardroom members.

Now, admittedly Australian companies were going slowly backwards and in 2010 reached a lamentable five women on the board of the largest 100 firms.

But in the first six months of this year there were 37 female directors – about 10 per cent of the total.

The big banks, according to O’Reilly, are now tying targets for women’s recruitment, retention and promotion to Key Performance Indicators.

There are taskforces underway in this country to try to improve the penetration of the top echelons by women executives. And clearly most businesses are terrified these will result in a Norwegian-style quota system.

The Australian example does, however, offer a possible compromise. British companies are used to the idea that they can reveal but explain why they do not conform.

Forcing them to make an audit of their top women as part of their stock exchange listing requirements would benefit those investment funds for which these issues are important, would inform students wishing to apply for jobs with long term promotion possibilities and would give valuable information to their own staff.

(*) We hope to have Kate O’Reilly blog for the Financial Mail Women’s Forum on her experiences in the financial services sector of Australia.

Tags: boardroom quotas, glass ceiling, Kate O'Reilly, Lisa Buckingham, Private Equity, Women in the boardroom

Posted by Lisa Buckingham on Monday, October 11th, 2010 at 9:19 am.

Filed under Ask an Expert, Careers, Columnists, Equality, Lisa Buckingham, SMEs, Starting a Business, Tagged as: , boardroom quotas, glass ceiling, Kate O'Reilly, Lisa Buckingham, Private Equity, Women in the boardroom.