Most of us, reading recently that Sainsbury's may be taken over by private equity, would have grasped the first two-thirds of the proposition, but not the last bit. Business reporters never explain what private equity actually is, on the same principle, I suppose, that sports reporters don't explain offside or leg-before-wicket.
We need to know about private equity, though. Remember what happened to Little Chefs, those roadside cafés where even quite discerning people (such as New Statesman readers) used to stop? They were taken over by private equity and have never been the same since. Puzzled that the AA, once a life-saving knight of the road, is now so hated by trade unions? Also bought by private equity. Worried about the future of newspapers? Private equity is likely to step in again. George W Bush Sr, Sir John Major and Bono are among those who are or have been mixed up with private equity firms, which now raise more money than the London Stock Exchange. The firms are variously described as locusts, barbarians, robbers, predators, plunderers - and the purest form of capitalism.
A few years ago, private equity was a fringe activity that involved just a few rich people. Now, it's highly likely that your high-street bank has lent shedloads of money to private equity concerns, increasingly likely that your pension fund has invested in them, and possible that you're among three million Britons who work for companies controlled by them. The Financial Services Authority (FSA) has started a public consultation on private equity, and the Institute for Public Policy Research (IPPR) is planning a research project. To try to convince us it has the public good at heart, private equity held a gala dinner last month to launch a charitable foundation. The GMB picketed it, handing out sick bags.
So what is it? Put crudely, private equity buys, as cheaply as it can, a company that is thought to be underperforming. It borrows heavily to finance the purchase, and then uses the cash flow over, say, five years to pay off the loan, while also cutting costs ruthlessly. It sacks staff, cuts wages, sells off assets, outsources, screws suppliers (amazingly, some think Sainsbury's can do more of that) and, more often than not, reduces services to customers. The one thing private equity doesn't do, as a rule, is invest. With luck, it ends up with a highly profitable company, and sells it back, at a far higher price, to the people it bought it from. That's roughly what happened to Debenhams.
A trend in reverse gear
You could say private equity does capitalism's dirty business in the dark. A public company, quoted on the stock exchange, is accountable to a wide range of shareholders. Strict rules - well, rules anyway; how they are applied is another matter - govern how it's run and what it discloses. For example, it has to make quarterly reports about its financial position, issue warnings if profits are about to plunge, keep shareholders informed of its plans, and publish the remuneration of senior executives. A private company has no such obligations. The privatisation of nationalised utilities represented one stage in the onward march of capitalism. Taking companies out of the publicly quoted stock market - and therefore beyond the reach of much public regulation - represents another stage, with Britain and the US again leading the way.
Not all private equity buy-outs succeed. Some make spectacular gains; other companies crash under the weight of debt. That is one reason why the FSA is concerned. If several private equity firms were suddenly to go belly up, they could, in the FSA's prim language, "pose a risk to orderly markets", which might be exciting for the Socialist Workers Party but probably not for the rest of us.
Private equity is developing very fast. It is beginning to create its own mechanisms for trading shares and, instead of being brought back to the public market, more firms are staying private. The IPPR's chief economist, Howard Reed, points out that, since private company shares aren't publicly for sale, the likely result is that economic power and control becomes more concentrated. "If private equity becomes the dominant form of corporate ownership," he says, "the trend of the past 150 years is reversed." Bang go the Tories' dreams of people's capitalism. Bang, too, go new Labour's hopes of corporate social responsibility.
So what are the solutions? Private equity has advanced so quickly - the value of the firms involved has tripled since 2004 - that nobody really knows. Company law could be changed, and private equity made more transparent. But new Labour is desperate not to be seen as the party of regulation, and lives in terror of frightening away foreign investors. Meanwhile, if private equity gets its hands on Sainsbury's, we should (the experts tell me) expect the queues to lengthen and the choice of apple varieties to diminish.