Private equity's future impact on the Thai travel industry?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Private equity funds have been rising in importance for several years.
Private equity funds are touted as a way of restructuring companies to make them more efficient and increase their value.
Private equity funds buy public companies and turn them into private companies.
A private company does not have to reveal as much information to the public about what it is doing and faces fewer regulations.
With more freedom of action, private companies can quickly make changes to a business.
The wages and benefits of workers such as health insurance are often reduced.
Sometimes workers lose their jobs.
These fired employees might have a very difficult time finding another comparable job, especially if they have invested many years working hard in their company and are now old and nearing retirement.
International standards of corporate governance have started to recognize workers as stakeholders in businesses whose interests must be protected, as well as the interests of shareholders.
The government may end up footing the bill for their living and medical expenses if they cannot find another job.
When private equity funds have crossed national boundaries and tried to buy companies in other countries, they have run into cross-cultural problems too.
Countries often have different cultural traditions regarding employment and also may not feel comfortable when a foreign company comes into the country, does a lot of invisible and hidden things, and then walks out of the country with a load of cash, as though they just robbed a bank.
Long Horn Fund tried to restructure and sell off a Korean bank for a large profit but abandoned the project when it became apparent that Korean authorities were not going to allow them to go through with the deal.
Recently, international federations of unions have begun monitoring the activities of private equity funds and their impact on workers:
http://www.union-network.org/uniindep.nsf/privateequity
Calls have been made for the G8 grouping of nations to investigate the impact of private equity on labour.
For further reading, read a Bangkok Post article last year on the legacy of the Thai economist Puey Ungphakorn on corporate governance whose sons Jon Ungphakorn and Giles Ungphakorn have risen to prominence in politics in recent years.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Why have global trade unions began to monitor private equity funds?
2. What is the IUF? Where is its headquarters?
3. Why did the IUF set up a special website to monitor private equity recently?
4. How does the international influence of private equity funds compare to that of TNCs, according to the IUF?
5. What do private equity funds typically do with a company and how does this affect employees in the company?
6. How do business objectives and practices change after a company is bought by a private equity fund, according to the author?
7. Do private equity firms take a short- or long-term perspective in their restructuring of businesses, according to the author?
8. Do shareholders necessarily take a short-term perspective on company profits?
(Question for open discussion, debate, and research. The answer is not in article)
9. Is long-term employment an important part of a country's culture that is worth preserving, even if firing these employees might make the company more profitable? (Question for open discussion)
10. If a private equity fund in United States, for instance, buys a company in another country, South Korea for instance, restructures it, and then resells it quickly for a profit, taking the profits back to their own country, is this stealing assets that really belong to the other country? (Question for open discussion)
Bangkok Post Article April 9, 2007
Clout of private funds worries hotel workers
By Imtiaz MuqbilEven as consultancy companies begin to keep an eye on cronyism and nepotism among the boards of public lodging companies (Travel Monitor, April 2), global trade unions are beginning to track the movements of private equity funds, many of which are becoming prime investors in the cash-rich travel and tourism industry.
The IUF, a Switzerland-based federation of international unions in the hotel, catering, food and farm sectors, has launched a website [www.buyoutwatch.info] to promote transparency and accountability in the way private equity funds do business and strengthen the unions' collective response against what they fear will be "a catastrophic impact on employment and working conditions".
An IUF commentary accompanying the website has this to say about private equity funds: "Likened by some to a plague of locusts, private equity funds have emerged as major owners of companies in the IUF and other manufacturing and service sectors. The top global buyout funds now control more overseas assets, and employ more workers, than the traditionally ranked leading TNCs.
"Trillions of dollars in recent years have gone into acquiring, restructuring and disposing of the companies, often with a catastrophic impact on employment and working conditions. With 2007 now being talked about as the year of the hundred billion dollar 'deal', leveraged buyouts cast a long shadow over our sectors [hotel and travel] and the global economy as a whole."
One specific section comments on the rising number of private-equity buyouts in the hotel industry noting that their only interest in hotel real estate is as a financial asset, not as a hotel business, which "has led to significant changes in the priorities and goals of hotel management."
"These changes are based on financial targets that include extraordinarily high rates of return to shareholders (15-20%), financing new hotel properties through debt rather than re-investing profits and the rapid acquisition and liquidation of hotel properties as 'real estate assets'."
According to the IUF commentary, "The strategy of separating hotel business operations from ownership of hotel properties is geared toward 'unlocking' the financial value of real estate assets.
"Hotel properties are sold not on the basis of business performance or profitability, but as a means of generating cash flow needed to satisfy the short-term demands of shareholders. As a result, hotels are seen by investors not as a long-term, viable service-provider, but as a bundle of assets to be deployed or redeployed depending on the short-run rates of returns that can be earned.
"This transformation of hotel properties into a bundle of assets that can be bought and sold on a short-term basis is largely the result of the entry of new financial players such as Real Estate Investment Trusts (REITs) as owners of hotel properties and private-equity funds as owners of real estate, hotel companies and/or brands."
The commentary says that in several countries the buyout activities of private-equity funds, geared toward large, short-term returns, have involved asset-stripping and closures.
"This destructive approach has led them to be labelled 'locusts' in Germany. Private equity funds undertake buyouts on the basis of an exit strategy, cashing in on the investment within three to five years. This is the opposite of a committed, long-term investment geared to the development of the company."
The commentary noted that even in Europe, where private-equity fund involvement in the hotel industry was relatively new, from 2001 to 2003 an average 33% of all transactions in hotel properties were the result of private-equity fund buyouts and divestments.
"The largest private-equity fund in the world, Blackstone Group, acquired five hotels in the past year, including the purchase of the hotel REIT MeriStar Hospitality Corporation (which owns 57 hotels under the Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson brands in the US) for US$2.6 billion.
"In 2005 Blackstone bought Wyndham International hotel group for $1.44 billion and subsequently sold the brand and franchise system to Cendant. In Europe, Blackstone recently bought the Hospitality Europe hotel group for $790 million."
It added, "Starwood Capital Group a US-based private-equity fund that holds $14 billion in real estate assets, including Starwood Hotel & Resorts Worldwide Inc. (Sheraton, Luxury Collection, Four Points by Sheraton, Le Meridien, Westin, St Regis, W Hotels) with 850 hotel properties in 95 countries and 145,000 employees. Starwood Hotel & Resorts Worldwide Inc is in fact a hotel REIT that was merged into other Starwood companies and the holding company, Host Marriott Corporation, in 2005.
"Even hotel properties that are not taken over by private-equity funds are subject to new financial pressures. Shareholders of hotel companies expect the same high rates of return paid out by these new financial players, which in turn shifts the priorities and goals of management.
"In fact, financialisation does not necessarily require a change in ownership to have an impact on the workplace. The threat of a hostile takeover, falling share prices or the withdrawal of investment funds may be sufficient to change business plans and investment decisions to meet the short-term demands of financial investors," the commentary said.
Imtiaz Muqbil is executive editor of Travel Impact Newswire, an e-mailed feature and analysis service focusing on the Asia-Pacific travel industry.
Vocabulary (in discussion above)
a private equity fund - "A fund that buys majority stakes in companies and/or entire business units to restructure its capital, management and organization. Usually the targets are delisted (unless already unlisted), held private and restructured over a period of 3-7 years, and then again listed through an IPO," because companies are held privately, information often does not need to be made public and regulations for public companies do not apply, so they can restructure more easily in secret (See Economist Glossary, Wikipedia on Private Equity Funds, Private Equity, a list of these funds, and a BBC article)
x touted as y - try to convince people that x is good because it is y (for example, he is being touted as the most talented singer in pop music)
a public company - a company which is permitted to offer its securities (i.e., stock, options, bonds) for sale to the public usually on a stock exchange, this requires that the company make start making financial information public (See Wikipedia on Public Companies)
corporate governance - "the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large." (See Wikipedia on corporate governance)
stakeholders - "Stakeholders are people who affect, and are affected by, the company. This means that a business has to fulfill the needs and wants of many different people ranging from the local population and customers to their own employees and owners. While this has an increased cost, many firms are now switching to this concept because it is perceived that the concept improves the image of a firm and makes them less likely to be targeted by pressure groups." (See Wikipedia on Stakeholder (law) and Stakeholder (corporate)
footing the bill for x - paying for x
Long Horn Fund - the private equity fund whose purchase of Korean Exchange Bank was blocked by South Korean authorities (See Wikipedia)
the G8 - an international forum for the governments of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. Together (See Wikipedia on the G8)
consultancy - a company that provides consulting services (provides advice on certain specialised problems)
keep an eye on - watch with suspicion
cronyism - using political power to give positions and special privileges to friends (See Wikipedia on Cronyism)
nepotism - using power and influence to get jobs and benefits for family or friends
lodging - provided with a place to stay for a period of time (for example in a hotels, motels, or inn)
The IUF - International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Association, a Switzerland-based federation of international unions in the hotel, catering, food and farm sectors (See Wikipedia on the IUF)
catering - providing food and drink to large numbers of people (for example at a wedding or a party)
rent-seeking - the extraction of uncompensated value from others without making any contribution to productivity, capturing special monopoly privileges (See Wikipedia on rent-seeking)
transparency - when every aspect of an organisation or process is visible, so there are no opportunities for rent-seeking (hidden profits, corruption, bribes)
accountability - when people must be prepared to justify their actions, being responsible for one's actions
a locust - large insects that live in hot countries, they fly in large groups and eat crops (See Wikipedia on locusts for pictures)
a plague of locusts - when a large swarm eats all the plants in an area (See Wikipedia for an example)
TNC - a "trans-national corporation" or "multi-national corporation" (See Wikipedia)
restructuring - making major changes in the organisation of a company, changing the management, cutting wages, firing employees, or changing the way the company is financed, for example by using more debt than equity.
leveraged buyouts (LBO) - when a small group of investors buy a company using a lot of debt (more than 70%), often using high yield or "junk" bonds, often management buys the company they are working for, so that it is now privately owned by them (Source)
cast a long shadow over - threaten (because their operations are hidden, all you can see is their shadow)
a buyout - when some owners purchase the shares of other owners
x buys y out - owner x buys all the shares of owner y
acquisition - buying an company
liquidation - sell an asset to get cash
geared towards y - made suitable for y
gear x to y - to adjust x so that it is suitable for y
gear up for x - get ready for x
cash flow - cash being received and spent by a business during a defined period of time, can be used to evaluate the performance of a business or project (See Wikipedia on Cash Flow)
viable, a viable plan - a plan that can succeed
a bundle of assets - a group of assets (a business is more than just the assets that it owns)
deploy x - organising and making x ready to be used quickly when an opportunity arises
Real Estate Investment Trusts (REITs) - (See Wikipedia)
asset-stripping - to buy a company for its valuable assets, take the assets and
an exit strategy - a way to escape from a very difficult situation (See Wikipedia)
cashing in on x - making money from x
divestments, divest assets - to get rid of and sell assets that you own
Blackstone Group - one of the largest private equity funds (See Wikipedia on the Blackstone Group and a list of companies that they own)
financial - the raising of funds to operate a company, through debt and equity (stock) which are known as "financial assets"
-ise - (verb) make into, transform (for example, a security -> securitise = make into a security)
-tion - turns a verb into a noun
-isation - a process (for example: security -> securitise -> securitisation = the process of turning into a security)
financialisation - turning companies into a bundle of financial assets that are bought and sold, without thinking of the employees as stakeholders
a hostile takeover - a company is bought but does not want to be bought
Answer Key:
1. Why have global trade unions began to monitor private equity funds?
Because they have started to become big investors in the travel and tourism industry
and the employment and working conditions of workers in these industries might
be affected.
2. What is the IUF? Where is its headquarters?
The IUF is an international federation of unions "in the hotel, catering, food, and farm sectors." Its headquarters are in Switzerland.
3. Why did the IUF set up a special website to monitor private equity recently?
They launched their www.buyoutwatch.info website to:
a. Promote transparency and accountability in the way private equity funds do business.
b. Strengthen the unions' collective response against the "impact on employment and working conditions".
4. How does the international influence of private equity funds compare to that of TNCs, according to the IUF?
Leading private equity firms have more intrernational influence than the leading TNCs, "controlling "more overseas assets, and employ more workers, than the traditionally ranked leading TNCs."
("The commentary noted that even in Europe, where private-equity fund involvement in the hotel industry was relatively new, from 2001 to 2003 an average 33% of all transactions in hotel properties were the result of private-equity fund buyouts and divestments.")
5. What do private equity funds typically do with a company and how does this affect employees in the company?
Private equity funds buy a company, restructure the company, and then resell it for a large profit.
This restructuring often has a very negative effect on employment and working conditions.
("Trillions of dollars in recent years have gone into acquiring, restructuring and disposing of the companies, often with a catastrophic impact on employment and working conditions.")
6. How do business objectives and practices change after a company is bought by a private equity fund, according to the author?
Debt is increased and very high short-term profits are targetted. This has an impact on the long-term viability of the business, according to the author.
("These changes are based on financial targets that include extraordinarily high rates of return to shareholders (15-20%), financing new hotel properties through debt rather than re-investing profits and the rapid acquisition and liquidation of hotel properties as 'real estate assets'.")
("Hotel properties are sold not on the basis of business performance or profitability, but as a means of generating cash flow needed to satisfy the short-term demands of shareholders.")
7. Do private equity firms take a short- or long-term perspective in their restructuring of businesses, according to the author?
They take a short-term perspective in their restructuring of businesses.
("Hotel properties are sold not on the basis of business performance or profitability, but as a means of generating cash flow needed to satisfy the short-term demands of shareholders. As a result, hotels are seen by investors not as a long-term, viable service-provider, but as a bundle of assets to be deployed or redeployed depending on the short-run rates of returns that can be earned.")
8. Do shareholders necessarily take a short-term perspective on company profits?
(Question for open discussion, debate, and research. The answer is not in article)
One might object to the negative impact of private equity restructurings on labour, and yet believe that the company might do better in the future under the the restructuring.
In recent discussions of corporate governance employees are sometimes considered stakeholders with interests important for corporate decisionmaking.
9. Is long-term employment an important part of a country's culture that is worth preserving, even if firing these employees might make the company more profitable? (Question for open discussion)
This is a problem that is being raised in many recent anti-FTA protests, for instance in South Korea.
It is also a problem raised by private equity fund operations outside their own country, for example, American private equity in Europe.
10. If a private equity fund in United States, for instance, buys a company in another country, South Korea for instance, restructures it, and then resells it quickly for a profit, taking the profits back to their own country, is this stealing assets that really belong to the other country? (Question for open discussion)
From the perspective of some people, this is what happened with Lone Star Fund's purchase of Korean Exchange Bank.
