Dodging the City code

Former corporate stars are migrating to private equity to avoid strict governance rules.

by Patience Wheatcroft
Last Updated: 31 Aug 2010

When David Verey, the former Lazards chairman, lunches at the Savoy Grill, he may feel just a touch proprietorial about the place. Last year Verey surprised the City by joining the private-equity group Blackstone, which bought the Savoy Group from its shareholders. He now operates as owner rather than merely as an agent advising clients.

Like so many from the City and the corporate world, Verey has decided that private equity offers enticing opportunities. It operates away from the glare of the corporate governance spotlight that follows publicly quoted companies; it is energetic, fast-moving and potentially hugely profitable, and it's increasingly powerful.

In 2000, private equity invested $200 billion across the world. After a couple of slower years, last year showed an upturn and it's predicted that in 2004 private equity will significantly increase its grip on the world's businesses. That grip is already impressive: by the end of last year, the value of UK companies held by private equity was close to £100 billion.

The ultimate owners of those businesses are the wealthy individuals and institutions that put up the cash, but the people who decide where the money goes are not just fund managers; they become involved in running the businesses and often have a direct financial interest. They can ignore the Combined Code on Cor- porate Governance and their investors will not be concerned: all that matters is results. When the rest of the investment industry is accused of mis-selling or breaching Chinese walls, private equity is where the excitement is.

Verey, who had a brief and unhappy spell as deputy chairman of top stockbroker Cazenove after leaving Lazards, is thriving in his new environment and seems invigorated by the fact that no-one in the London office is older than 35, apart from Blackstone's European chairman and himself. That chairman is Sir Ronnie Grierson, the legendary former GEC vice-chairman, now 82, whose experience and contacts are exactly what an ambitious private equity house needs to balance the enthusiasm of its younger partners.

The list of former corporate stars who have migrated to private equity may concern those who believe that business behaviour should be codified.

Roberto Quarta, who as CEO of BBA effected a creditable turnaround of the industrial group, was certainly youthful enough to have taken on an even bigger challenge at another major company. Instead, he opted to be chairman of BBA but to devote most of his energies to the private equity group Clayton Dubilier & Rice (CDR). CDR gives its partners hands-on roles in the companies it buys, so Quarta is running an Italian telecoms firm.

Luc Vandevelde, chairman of Marks & Spencer, raised eyebrows when he decided to combine the role with running a private equity operation specialising in retail situations. His reputation as 'Lucky Luc' may have persuaded the Halley family - which made its fortune with the European chain Promodes - to put up much of the cash to back his Change Capital.

Another retail dynasty, the Brenninkmeyers of C&A, has also decided that private equity is the sensible way to invest and has put its cash into London-based Englefield, a firm with expertise in retail and media that includes partners from US private equity firm Warburg Pincus.

At UK private equity group Apax, the team includes the two Grabiner brothers, who both tired of working in the unforgiving world of listed companies. Michael ran Energis and Stephen Ondigital, both of which hit difficulties, yet the pair still had their fans in the City. It would be surprising now, however, if either came back into the publicly quoted arena.

Private equity houses are signing up talent wherever they see it. Thomas Middelhoff was the CEO of Bertelsmann and only two years ago was judged one of the most influential people in the European media business. A year later, his aggressive expansionist stance looked decidedly out of place and he was shown the door. But now he's a European adviser to private equity house Investcorp, which has the pleasure of investing the billions that wealthy Bahrainis have to spare.

Middelhoff may not be the man that Investcorp wants to have running its businesses, but the firm has noted that as a source of information on the European media scene, and of contacts within it, he is probably unrivalled.

Private equity values insight and influence: hence the extraordinary boards that some firms have assembled. The most intriguing is Carlyle, the US firm that finds it useful to have John Major as chairman of its European operations. As the business experience of the former British prime minister is limited, some wonder what his contribution to Carlyle may be. But the organisation has prospered with its politically well-connected network. George Bush senior recently resigned from Carlyle.

There will be no shortage of candidates to replace him.

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