Sarah Green column

Feb 20 2007 By Sarah Green, The Journal

In recent weeks politicians and trade unions have lined up to rail against the City and private equity houses.

One union leader described the latter as `robbers and plunderers', intent on predatory asset-stripping to line the pockets of their expensive suits and purchase their next yacht.

A similarly cynical view is held of the rest of the City with tales of ill- gotten profits and bumper bonuses the common currency of critics.

Tax these capitalist plunderers comes the cry, squeeze them till the pips squeak, they deserve it.

And most of us do feel uncomfortable about a society in which some people can generate such enormous levels of personal wealth while so many others remain on low incomes.

The truth, though, is that the City is a glittering jewel in the crown of the British economy. It employs 1.5% of the workforce yet generates one-tenth of the country's annual wealth. Of the £42bn of corporation tax paid to the Treasury last year, one pound in every five came from the City. The fact that someone makes a profit does not mean someone else makes a loss. In a growing economy it is possible for everyone to benefit.

And bowing to demands to intervene would risk killing the goose laying the golden eggs. Soon the only cheers heard would be in New York, which is desperate to claw back the talent and business that clumsy attempts to regulate Wall Street have driven to London.

Equally, private equity offers a compelling model to improve companies' performance and financial structure.

The whole aim of private equity investment is to sell on the asset at a profit so managers have a real interest in the long-term health of the company.

If they strip out its assets they won't have a viable business to sell and most outfits emerge from private equity ownership a lot healthier than when they went in.

And a healthy business means sustainable employment, strong growth and more tax revenue to fund public service improvements for the Government.

But private equity houses should recognise that a new approach is necessary given their new-found economic importance. The real value of their business must be more widely understood. If not, the risk is the critics' `disinformation' will gain traction and knee-jerk regulation will follow. That would be a big pity, both for them and the country.

Sarah Green is regional director of CBI North-East.