I expect few of those reading this column will have ever heard of Kohlberg, Kravis, Roberts & Co, the Blackstone Group or Permira Advisers LLC.
That said, you will undoubtedly have heard of some of the companies they are behind.
In the high street, they are the private equity firms
that back many of the shops we buy from (whether you shop in Poundland or Liberty) and many of the chain restaurants we eat in (Wagamama, Pizza Express and EAT to name just a few).
There are very few sectors of the economy in which they are not represented.
The British Venture Capital Association (BVCA), the industry body for private equity and venture capital in the UK, reckoned that its members invested £12.2billion globally in 2012 (down from £18.6billion in the previous year), with investment in UK companies making up £5.7billion of that.
Their omnipresence was recently documented by Becky Pritchard in a piece for the Wall Street Journal.
Becky set herself the task of living “without” private equity for a week, avoiding goods and services that were backed by P/E, something which proved rather time consuming and more than a little inconvenient, given leading global plumbing supplier Armitage Shanks is, you guessed it, private equity backed.
Many people have a media-fuelled perception of private equity as being led by asset-stripping vulture funds and therefore a negative force in the economy.
However, many businesses owe their survival and growth to the fact that a P/E fund was prepared to invest in them. Where would we be, for example, if Hilco Consumer Capital had not taken a risk on HMV last year? Probably heading towards an age dominated by downloads and online streaming.
So should we, in the best traditions of Scottish independence, chain ourselves to the door of our local Pizza Express and say “hands-off, private equity”?
Well, that rather depends on who stands, in turn, behind private equity and the answer to that question may rather surprise you. We do.
The private equity firms, at their simplest level, manage pools of money for other people.
The “other people” in this case are very often pension funds (from within the UK and further afield) or other private and public sector investors who are increasingly looking globally for investment opportunities which will match the demands placed upon them by a population with an ever-increasing lifespan.
One of the largest P/E investors in the world is CalPers – the Californian Public Employees’ Retirement System, which represents 1.6million public employees, retirees and their families and controls a fund with a market value just shy of $300billion.
Perhaps the best example of this increasingly global phenomenon comes from the dear old Church of England.
No sooner had the Archbishop of Canterbury last year railed against the evils of payday lenders than it was discovered that the Church itself held a small stake in Wonga through an investment in a fund managed by US venture capital firm Accel Partners.
Venture capital, it would seem, does indeed move in mysterious ways.
High street names are not the only companies P/E invests in.
Technology and industrials represent 44% of the investment the BVCA’s members make.
What may surprise you is that oil and gas historically represents one of the least active sectors for private equity. Only about 3% of the amounts invested in 2012 by BVCA members were in oil and gas, dwarfed by investment in alternative energy sectors.
Within that 3% much of the focus is in service and support companies, from secondary buy-outs of long standing businesses to backing plucky newcomers. Aberdeen-based LDC has backed four oil service companies totalling over £10million of investment.
The under-representation of P/E in oil & gas is, however, quickly beginning to change as the sector becomes an increasingly inviting space for such players to invest in.
March saw the final closing of KKR’s $2billion North American oil and gas fund focused on investing in unconventional oil and gas resources.
June saw the announcement of the first disposal by an upstream oil and gas company (FTSE 100 oil and gas company, BG) of an offshore pipeline asset in the North Sea to an infrastructure fund in a deal worth over £500million.
So private equity may increasingly become as significant a force shaping the development of the oil and gas sector in the North Sea as the oil majors and, with all our pension pots behind it, this “democratisation” of the oil economy will be one we are all stakeholders in.
Indeed, just as traditional P/E managers are getting more into oil and gas, less conventional sources of funding are equally joining the party.
Two enterprising Houston attorneys have established a crowd-funding platform, “Energy Funders”, focused on the sector, offering the potential to cut-out the middle man and by-pass traditional P/E structures.
With Aberdeenshire being the home of BrewDog, one of the most successful UK crowd-funded businesses to date, it’s not perhaps too much of a stretch of the imagination to think that we one day soon may see crowd-funded projects in the North Sea.
Penelope Warne is senior partner & head of energy at international law firm CMS Cameron McKenna
Recommended for you
