MPs on the Commons Treasury Select Committee are considering widening their
high-profile investigation into the controversial private equity industry,
The Times has learnt.
Senior members of the committee said yesterday that they wanted to ensure that
the inquiry’s scope was sufficiently broad that no stone was left unturned
in scrutinising private equity’s activities.
Angela Eagle, a Labour member of the committee who has been one of the most
prominent critics of private equity, said: “We may well open this up to
include others. I don’t think anyone can assume that they’ve got away with
keeping their heads down.”
If last week’s showdown between the Treasury Select Committee and Britain’s
private equity lobby group was anything to go by, the top bosses set to
present evidence today had better be well-prepared.
Damon Buffini, head of the British group Permira, David Blitzer, senior
managing partner in Blackstone, Dominic Murphy, of Kohlberg Kravis Roberts,
and Philip Yea, chief executive of 3i, will face a lineup of MPs, led by
John McFall, who last week attacked the British Venture Capital Association,
leading to the resignation of its chief executive two days later.
The committee will continue to focus its questions on key themes. Top of the
list will be taxation and the debate around carried interest.
At the heart of the issue is the tax relief that partners gain from the
“carry” that they earn on their investments, or acquisitions. Because these
investments are treated as capital gains for tax purposes, they are subject
to taper relief, which means that private equity partners, who often
contribute some of their own money as part of a deal, end up paying as
little as 10 per cent tax, or even less, on the carried interest they book
as profits.
Since partners generate the bulk of their income from carry, rather than from
their salary or bonus, it is easy to see why this has become such an emotive
subject and why many MPs on the committee believe that private equity
partners are bending the rules to maximise their own gain.
Private equity argues that there is no special tax treatment of private equity
firms and that they simply use rules available to anyone who invests in
assets and sells them on at a later date. That’s true, but the rules were
designed to give breaks to entrepreneurs and small businesses, to help them
get started. Opponents argue that, in private equity’s case, the net effect
is not what the Government intended.
Transparency and accountability are another key issue. Private equity firms
have typically shied away from public attention. They do not publish
accounts nor give any details behind the workings of their deals.
Their accounting is often offshore, for tax purposes, and, unlike public
companies, there is no public record of what senior partners earn. This was
less pertinent when their deals were smaller, but now their size means that
private equity employs vast swaths of the population through ownership of
businesses such as Boots and the AA. Critics argue that private equity firms
therefore need to speak up and be more accountable to interested parties.
The buyout firms say that they are fully accountable to the only people who
matter – their investors. They are willing to provide reams of information
about their portfolio companies, but, other than that, they are not
duty-bound to explain the inner workings of how they operate or produce such
lucrative returns.
Excess leverage and private equity’s effect on the overall economy if things
turn down is the other hot topic.
In recent weeks, the Financial Services Authority, the International Monetary
Fund, the European Central Bank and the Bank of England have all expressed
concern about the amount of debt being piled into private equity
transactions. So far this year, the firms have borrowed more than $80
billion (£40 billion) to fund transactions as banks rush to lend more cash
and pick up the associated fees.
It is not just the availability of debt that is worrying; it is the price of
the debt and the fact that covenants on loans are becoming lighter and
lighter, or in some cases nonexistent.
That’s all well and good when times are good and markets are buoyant, but what
happens when things go bad? The concern is that banks will be left holding
on to billions of private equity debt and that overleveraged companies will
be failing left, right and centre. That, in turn, could have a serious
impact on the UK economy.
Philip Yea, of 3i, is no stranger to controversy. The
52-year-old opted to take the reins at the quoted private equity firm in
2004 after spending 14 months negotiating to become chief executive of
British Land. While it was understandable that he should think twice about
playing second fiddle to John Ritblat, his change of mind left the property
group’s succession plans in tatters.
If things had turned out differently, he might have ended up as boss of the
world’s biggest drinks group. As finance director of Guinness in the 1990s,
he was one of the architects of the merger with GrandMet to create Diageo.
He quit in 1999 after he was told he would not be succeeding John McGrath as
chief executive.
Mr Yea has worked hard to transform the fortunes of 3i in the past three
years. Although the changes he has made have not been radical, they have
brought a new focus to the firm. He has moved away from its venture capital
roots by concentrating on bigger deals. The strategy meant a sale of myriad
minority investments in often tiny companies and enabled him to close down
3i’s costly UK office network and build an overseas presence. Targeting more
mature companies has also proved inherently less risky.
Mr Yea is married with three children.
Damon Buffini, of Permira, one of Britain’s highest-profile
private equity firms, is to be a key witness in front of the committee
today, having been the only private equity partner to have spoken out in the
face of attacks against the industry from trade unions, MPs and the media.
The GMB union had criticised Mr Buffini for Permira’s involvement in the
buyout of the Automobile Association, after Permira and its partner CVC
acquired the motor breakdown services company for £1.7 billion in 2004 and
cut more than 3,000 jobs.
The 44-year-old must be becoming accustomed to attracting attention. With an
estimated net worth of £100 million, he is making appearances on City rich
lists. Brought up on a Midlands council estate, he is a Cambridge graduate
who also excelled at sport. He set up Permira in 1985.
The firm now has 19 funds, managing £14 billion. Other purchases include Birds
Eye and the gaming company Gala Coral Group. It made a 600 per cent return
from the £900 million sale of Homebase to GUS in 2002.
Peter Taylor, of Duke Street Capital, is comfortable with the
prospect of greater public scrutiny of his business. He says the view that
private equity deals spell job cuts is hopelessly outdated. Instead, Duke
Street likes to add to the businesses it buys; he points to Adelie Food
Holdings, which the private equity firm created with the purchase of two
companies last year and has expanded with three more buys, with more to
come.
Although Mr Taylor is not appearing at tomorrow’s Treasury Select Committee
hearing, he is due to appear later after Angela Eagle, the Labour MP,
criticised his company’s acquisition of Burton’s Foods, the maker of Jammy
Dodgers and other biscuits. She publicly attacked the firm for high-profile
job losses in her constituency, Wallasey in Wirral.
Mr Taylor is one of 16 investment executives at Duke Street, which also owns
Satellite, the engineering group, and has just sold Focus, the DIY retailer,
to Cerberus, a US competitor, for a nominal £1. Duke Street concentrates on
UK and French acquisitions. Unlike a number of competitors who have moved on
to bigger prey, the firm concentrates on the mid-market, with the typical
purchase coming in at about £114 million. Duke Street has £1.18 billion
invested and manages a total of £1.4 billion.
Robert Easton, of Carlle Group, will be one of the more cerebral
private equity bosses to appear before the select committee.
He has a first class honours degree from Imperial College, London and a
doctorate in organic synthesis from New College, Oxford. He is on the board
of Imperial’s Tanaka Business School. Before joining Carlyle in 2000 he was
vice-president of corporate development at Invensys, the engineering group,
where he was responsible for acquisitions and disposals. He had previously
worked at BTR and was a key figure in the merger with Siebe to create
Invensys. During his time with the company he claims to have executed 35
deals with an aggregate value of ¤before that spent eight years as<NO>Wasserstein
Perella.
At Carlyle, which has almost $60 billion under management, has investments in
companies including Baskin-Robbins, the fast food chain, and Avio, the
defence group. Dr Easton is one of several European managing directors
leading the buyout team in London. He is on the board of four of its
investments, including Firth Rixson, the metals group, and Ensus, the
bioethanol group in which Carlyle recently invested £250 million.
The 44-year-old is married with two children and has a handicap of 10 at
Surrey’s Walton Heath Golf Club.
David Blitzer, of Blackstone, is one of the group's most senior
managing directors in London, having moved here in 2002 from the US to set
up the firm’s European private equity operations. Since then, Mr Blitzer has
been involved in just about every big deal the firm has done in the region
including its investments in Spirit Group, Sulo, Aspen Insurance Holdings,
Houghton Mifflin and Orangina. The tough-talking New Yorker, who graduated
magna cum laude from the Wharton School of the University of Pennsylvania,
has a reputation for being as sharp as a razor and not afraid of speaking
his mind. He’s not dissimilar in that regard to Blackstone’s founder Stephen
Schwarzman who, unlike his UK counterparts, is not afraid of publicity. Mr
Schwarzman has led the firm since its founding in 1985 and has turned it
into one of the world’s biggest buyout groups, with a $16 billion (£8
billion) fund. It has recently made history by becoming the first private
equity group to announce plans to go public.
Dominic Murphy, of KKR, is the British partner who led the
firm's high profile £11.1 billion acquisition of Alliance Boots, Europe's
biggest private equity deal and the first to take a FTSE 100 company
private. It was the size of the Boots’s acquisition and its use of covenant
lite loans that has brought Mr Murphy to stand in front of the committee
today, rather than Johannes Huth, KKR’s top partner in Europe. Mr Murphy,
40, was previously a partner at Cinven, the UK private equity group, where
he invested in many businesses including Peacocks and William Hill. He
studied at Liverpool University and his first job in the private equity
sector was with 3i Group. Although the US firm, which was founded in 1976,
is one of the largest private equity players in the world, KKR has completed
few acquisitions in the UK, with Boots the notable exception. KKR has been
the most prolific spender in the buyout world this year, notching up such
massive deals as the acquisition of TXU Corp, the Texan utility, with Texas
Pacific Group, for $45 billion in the world’s biggest leveraged buyout; the
buyout of First Data Corp, the technology services group, for $29 billion
and the acquisition of Dollar General, a Tennessee-based operator of variety
stores, for $7.3 billion.
