Private equity – good for business information?
Jinfo Blog

13th August 2007

By Tim Buckley Owen

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With the recent report from IRN showing that business information is on a roll – see http://web.vivavip.com/forum/LiveWire/read.php?i=83 – it was only going to be a matter of time before private equity investors started eyeing this potentially lucrative target. Now Outsell has published a report examining the impact of private equity on information markets. What makes publishing businesses so attractive? it asks. What criteria do private equity investors use to evaluate potential investments? And how might publishing marketplaces change as more businesses come under private equity ownership? But it also poses some more troubling questions: What are the challenges facing private equity? Might the bubble burst? With Incisive Media and Wolters Kluwer among the case studies profiled, it’s clear that private equity has come very close to home as far as information professionals are concerned. (More details of the Outsell report – price $695 – are available at http://www.outsellinc.com/store/products/521) MPs on the Treasury Committee have been giving private equity representatives a hard time because of the generous tax breaks they enjoy and the fact that they sometimes asset strip, firing staff and selling off property. So should the information industry welcome or shun their attentions? Private equity businesses work by buying up companies that they believe could be doing better, shaking them up and then selling them on at a profit. They don’t raise money on the stock market to do this, but get it from private sources such as banks or by pooling the funds of smaller investors. Many of the firms they buy are listed on the stock exchange but are then withdrawn so the private equity firm can try to turn them round – raising issues of transparency and lack of accountability. (An FAQ feature at http://news.bbc.co.uk/1/hi/business/6221466.stm provides further details, as does the background to a BBC Radio 4 programme Risk, Rigour and Reward, which was broadcast earlier this month – see http://news.bbc.co.uk/1/hi/programmes/6929394.stm) Writing in his blog, the BBC’s economics editor Evan Davis points out that, because the managers are the shareholders and will take the profits, they have every incentive to run the company well. But they finance their purchases by incurring debt, which they tend to put into the companies themselves. So if the company succeeds they take a huge profit, but if it fails they are protected from further liability by the insolvency laws. In other words, the risks are not fairly distributed between the company and the investors. (See http://www.bbc.co.uk/blogs/thereporters/evandavis/2007/06/private_equity_some_thoughts.html for the full argument.) So a private equity deal could turn round a well regarded but under-performing information company – or might kill it altogether. Information users should keep a close eye on what private equity firms do with the companies they buy.

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