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Investors who handle other people's money seem to be a forgiving lot.
The Institutional Limited Partners Association, a body which represents investors including sovereign wealth funds, has joined the battle to try to persuade the European Union not to be too tough on the industry.
It has written to new EU internal market commissioner Michel Barnier to protest against a proposal that money based in the EU would not be allowed to invest in private equity funds run from outside the European Union and vice versa.
The association is also concerned by efforts to limit the amount of debt that can be injected into a business bought by private equity. As well as cutting down their investment opportunities, they say donning the mantle of public policy that such proposals risk cutting EU companies off from the flow of private equity capital.
What is odd about this is that most of these funds leaping to the defence of the industry must have lost a packet by investing in it so one would imagine they would want to hang the typical private equity house out to dry, not seek to preserve it.
Indeed it was fitting that the same issue of the Financial Times which reported the investors' lobbying also included an article by Luke Johnson himself an entrepreneur and successful user of private equity which concluded that the private equity business model the investors seek to preserve has been largely discredited.
His points were not original but coming from the inside they have more power. He said, for example, that almost half the private equity investments ever made were deployed in the three years between 2005 and 2008 and a significant amount of that has been lost. There are hundreds of zombie companies where the equity is worthless.
Many investors will spend years locked into funds which have little chance of ever making a profit. Their returns will be dire but the private equity managers, collecting a 2% management fee annually for the life of the fund, will share nothing like their level of pain.
Indeed many have lost their hunger and now contemplate an extremely comfortable retirement. Nor will it be easy to make new investments to offset the disasters of the old. They cannot be financed because the banks are no longer willing to lend mountains of cheap debt. In addition all the easy targets have gone. As a result the industry is likely to shrink materially.
The solution, says Johnson, is for private equity to turn its back on financial engineering where the gains come from leverage, running the business for short-term profit and being able to sell it on a higher multiple in a rising stock market.
It will be a long time before the financial climate favours that kind of activity again. Meanwhile private equity needs to get back to its roots and supply development capital to help entrepreneurs grow companies and create genuine value.
Unfortunately it is much harder to do because there are not that many really good companies available to buy, not that many genuinely good ideas and a scarcity of entrepreneurs who can turn a vision into commercial reality. It is a challenge of a different magnitude from buying an existing, proved but undermanaged business, whacking in a mountain of debt and telling its managers they will get rich if they run it brutally for cash. Restoring value in this way is not the same as creating value in the first place.
It would be interesting to be told which vision of private equity it is that the international investors seek to preserve with our money. One suspects it is the one which Johnson says is doomed.
Enough delays for Equitable clients
While one insurance company has been making all the news in recent weeks another might shortly return to the headlines.
It is almost a decade since a chain of events crippled Equitable Life and forced it to close to new business. Now, the retired judge Sir John Chadwick has indicated that he will publish his final report, commissioned by the Government, which aims to provide a formula under which the taxpayer might provide compensation for the losses suffered by the members of the society to the extent that they were caused by failure of regulation.
That is the good news. The less good news is that the target date for publication is May which means it is almost certain to get snarled up in the election. The Government has indicated that it will act speedily on Sir John's report while reserving the right to determine how much it will in fact pay out but obviously it can only honour that pledge if it remains in office.
There is therefore a huge risk that the process could run into more delay. The Equitable is pressing the Conservatives and Lib-Dems to make clear their position on the prompt paying of compensation once Chadwick has reported, but thus far without success.
You don't have to be a genius to work out that a new government, hyped up about the deficit and looking for ways to cut government spending, might be tempted to impose further delay.
That, however, is a temptation which much be resisted. Equitable Life policyholders have waited long enough.
