An ITV documentary aired last week was as unfortunate as it was damning. While there's little sense in naming the GP whose portfolio company was shown up for poor – and in many cases shocking – practice, the funeral homes exposé has serious implications and serves as a tale of caution.
Private equity shareholders wield far more influence over their portfolio businesses than any stock-picker ever will. But having a seat on the board does not mean you can be on the shop floor day in, day out. Ultimate responsibility lies with a managing director or chief executive. All a fund can do is size that leader up as best they can and hope the underlying management keeps in step. That doesn't always work.
What's also clear is that in some cases the tools of the buy-and-builder's trade might need rethinking. Consolidation is nothing new. It's a great way to buy cheap, create new market contenders and arbitrage multiples on the way out. That works perfectly well with established businesses that adhere to strict corporate governance checks and play by the book. With mom and pop stores you often don't know what you're getting in to.
GPs may pride their deals on rigorous due diligence, but when you're funding dozens of bolt-ons with tiny, family-owned outfits, there's far less to go on. You can sift through what are likely flimsy financial records, run background checks and even pay a visit. But what happens when you've shaken hands and left the room is anybody's guess.
ITV's documentary also renews questions over whether private equity should stick with its “anything goes” approach. Should some sectors be off-limits? Dunedin once owned New Horizons Childcare, a regrettable deal that went awry when public spending was cut. The firm's main concern was putting the social carer on a firm financial footing, which it did. It swore never to touch the care industry ever again. With the benefit of hindsight, and after seeing the Daily Mail get its teeth into private equity over the shameful Southern Cross failure, it may be the best decision Dunedin ever made.
Investing where employees are paid modest wages to cater for vulnerable people – whether children, the elderly, the disabled, or families of the recently deceased – is asking for trouble.
And whatever private equity tells itself about job creation, bettering the economy and improving vital services, it's not liked by the public. A “financial sector” left to its own devices ruined the economy. Private equity, hedge funds, rogue traders, toxic mortgage lenders. As far as the public's concerned, it's all the same.
Today's news used to be tomorrow's chip paper. Today it's archived, a growing CV of failures and customers wronged. For many, the rewards of buying and building in these emotive sectors simply isn't worth the risk of being added to the record.