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Venture capitalists: parasites or prey?

For years, the press has demonised private equity. Ray Maxwell of Invesco asks - is this justified? Or is it simply that we don't like people who make lots of money?

Over the past few years private equity has not enjoyed the best press. Venture capitalists, in particular, have been portrayed as being grasping asset strippers with the morals, if not the eating habits, of Hannibal Lecter. While it would be overstating the case to say that most venture capitalists vie with Mother Teresa in the saintly stakes, the majority are thoroughly decent individuals with a laudable focus on the profit motive.

An example of the genre can be found in the Financial Times' Lex column of 12 March. In a piece entitled Private Equity, the author appeared to assault, mug, and cause grievous bodily harm to the asset class. The article says that: ‘You don't need a particularly jaundiced eye to conclude that the returns from private equity, both in the UK and in the USA don't match up to those available on public equity. Yet the investment carries greater risk, is harder to diversify and is considerably less liquid.'

Given that quoted markets around the world appear to be acting in concert and are so volatile as to induce a migraine, it is hard to agree with the Lex conclusion. Plus, since the private equity industry is now global, its saving grace has to be that it does actually provide broad diversification. Sure, the dispersal of returns is great but the industry in the UK, which was a child of the Thatcher years, is now coming out of adolescence into adulthood. Private equity groups in existence for over a decade with good performance will continue to garner support and the under-achievers will go to the wall. Unlike the stock market, where poor performers fall out of the index, private equity history remains recorded for years like an indelible stain.

Poor perception
It would be interesting to test the veracity of the Lex article, but my main concern is that the media has an extremely poor perception of private equity. In many ways it has been thoroughly hostile. This antipathy appeared to reach new heights during the bidding for the Rover Group, with Alchemy portrayed in almost pantomime terms as the wicked witch. The words venture capitalist were spoken through gritted teeth as a pejorative term for corporate rape and pillage. Similar to the ‘What have the Romans ever done for us' sketch in Monty Python's Life of Brian, the media had a selective memory, ignoring or forgetting that private equity has supported enterprise and has acted as the catalyst for corporate change and renewal. Well respected public companies in the FTSE100, such as Vodafone and ARM Holdings, have been recipients of venture capital funding in their not too dim and distant pasts.

So why have venture capitalists in the UK earned such a negative reputation? Clearly, the impact of dot.com mania has taken its toll but I believe that the malaise runs much deeper. There is within the UK psyche a deep mistrust of profit and the media plays on this anxiety. I am liberal in my general sentiment and believe in a fair society. But I am despondent at the attitude that the creation of profit is fundamentally unsavoury and that the quality of service is undermined when profit is involved. When the oil companies recently declared their headline profits the hue and cry was deafening but there was little comment on the actual returns on sales, assets, capital employed or equity. The assumption is that it is OK to make some profit. But it's not OK to make not too much - that's decidedly vulgar. Both entrepreneurs and venture capitalists are considered vulgar - success should be modest and mentioned only in hushed tones. In the US, entrepreneurs are held up as role models; in the UK, the media and the public take pleasure in taking people down a peg or two. The only entrepreneur who has avoided the pitfalls has been Richard Branson who has carefully cultivated the persona of ‘the peoples' champion'.

For the UK to change into a leading ‘knowledge-based' economy it will be critical that the public and the media embrace the values of enterprise and that the founders of businesses and their venture capital backers are seen to be vital in creating sustainable economic growth instead of being regarded as pariahs. I don't expect or want every entrepreneur or venture capitalist to achieve cult status but I believe that wealth creation should be considered as being virtuous.

Ray Maxwell is managing director, private equity, at INVESCO Asset Management www.invesco.com