UN warning over role of hedge funds

Date: Tuesday, October 17, 2006
Author: Edmund Conway, Economics Editor, Telegraph.co.uk

The United Nations has issued a controversial warning about the economic and social dangers facing countries where private equity funds take over a local company. It came after it found that a fifth of all major cross-border deals are now being masterminded by hedge funds and private equity groups.

The discovery underlines that these secretive investors are now responsible for a major slice of international investment and are an increasingly important component of the world economy.

Research from the UN Commission for Trade and Development (UNCTAD) found that private equity groups and hedge funds spent $135bn (£72bn) on cross-border mergers last year - 19pc of total activity.

While it acknowledged that these kind of investors were now extremely important for the flow of capital around the world, it added that it had doubts over whether this particular type of investment was always beneficial for the recipient country.

"The increasing activity of private equity funds in cross-border investments raises questions about the implications of such investments for the long-term growth and welfare of the host economies," it said.

It pointed towards the fact that unlike other kinds of FDI [foreign direct investment], private equity firms tended not to undertake long-term investments and quit in five to 10 years.

The UNCTAD report also found that the UK received the largest amount of FDI last year, with $165bn being spent by foreign companies in the UK. However, experts warned that almost half of the total was due to the restructuring of Royal Dutch Shell.