Memorandum submitted by the Carlyle Group
(15 January 2003)
INTRODUCTION
This statement aims to outline some of the key
factors why The Carlyle Group believes it is an ideal investor
in QinetiQ and strategic partner for the MoD, in preparation for
the HCDC hearing concerning the QinetiQ PPP.
1. Track record
Over the past 16 years The Carlyle Group has
grown into one of the world's leading private equity firms. It
has been at the forefront of the private equity industry's transformation
from a collection of boutique alternative investment firms to
well-established financial institutions.
The firm is a private partnership, owned by
senior investment professionals within the firm and CalPERS, the
world's largest pension fund that has a 5% ownership interest.
These investment professionals manage funds on behalf of Carlyle's
investors, which are comprised of public and corporate pension
funds, banks, insurance companies and some high net-worth families.
Each fund has a specific remit to invest within a particular geography
and investment sector such as buyout, technology venture capital,
high yield or real estate. Carlyle currently manages 23 funds
across the US, Europe and Asia.
By applying a conservative, disciplined and
rigorous approach to its investments the firm has achieved outstanding
returns for its investors. To date, the firm has invested $7.2
billion and achieved an average internal rate of return of 36
per cent.
Carlyle has invested capital into a diverse
group of industries including: aerospace, automotive, consumer
industries, defence, energy, industrial, technology, telecommunications
and media, (see chart below). Its strategy is to support strong
management teams that are well equipped to run the business. As
a result, the firm's employees do not take operational control
of portfolio companies but rather work through active boards of
directors.
Carlyle's reputation has attracted high-quality
investment professionals in all geographies. Globally the firm
employs more than 500 employees, while in Europe it employs 100
people based in Barcelona, Frankfurt, London, Milan, Munich and
Paris.
2. Ability to meet MoD requirements
When the MoD announced, in March 2002, that
it was interested in finding a strategic partner to invest in
QinetiQ it set out clear objectives for this partnership:
— enhance the opportunity for exploitation
of technology held by QinetiQ and contribute to the overall scientific
base
— improve access to technologies from
the civil sector for military application
— introduce private capital into QinetiQ
to meet its investment needs and thereby accelerate its development
through exposure to private sector disciplines
— provide increased freedoms for QinetiQ
in, for example, employees terms, conditions, reward and its ability
to grow commercial business
(Source: letter re: QinetiQ from MoD 15
March, 2002)
Carlyle's structure, experience and track record
make it a perfect partner for the MoD in achieving those objectives.
As a private equity firm, Carlyle's interests
in QinetiQ are perfectly aligned with the MoD's. As a financial
investor, Carlyle stands only to gain by QinetiQ's expansion and
growth following its investment. The firm's investors will only
realise a return on their investment when Carlyle's shares are
sold, probably at an initial public offering (IPO) within the
next three to five years. Until that time the capital invested
remains entirely at risk.
Indisputably, Carlyle has a wealth of experience
in overseeing the development of corporations of all sizes in
order to increase shareholder value. Through the years the firm
has demonstrated its ability to prepare companies for successful
IPOs and trade sales. Its investment professionals are keenly
aware of how to encourage and monitor the growth of companies
against a variety of economic conditions. This experience will
be channelled into QinetiQ at board level and help to steer QinetiQ
through the transition from public entity to private company successfully.
QinetiQ's competitive strength lies in its ability
to provide a unique combination of world-class science and services
to the government. Carlyle believes that a constant focus on customer
service and sustained investment in cutting edge technical abilities
are prerequisites to fulfilling QinetiQ's aspirations. In parallel,
Carlyle supports the QinetiQ management plan to continue to serve
the MoD as its primary and most important customer. Additionally,
we anticipate that QinetiQ will have the opportunity to grow its
commercial business as well.
With more than 60 investment professionals dedicated
to commercialising technology through the firm's venture capital
funds in the US, Europe, Asia and Japan, Carlyle is well qualified
to provide support to QinetiQ's venture operations. In addition,
Carlyle's buyout team has created a network of relationships with
large corporations that have the potential to become important
customers for new technology solutions.
In particular, Carlyle has extensive knowledge
of the telecommunications and IT markets—both key markets
for QinetiQ. To date, 35% of the firm's corporate transactions
have been invested in these industries. Carlyle's recent appointment
of Louis Gerstner, former CEO and chairman of IBM, as its new
chairman underlines its ongoing commitment to these sectors.
As a prominent player in the financial community,
Carlyle has developed deep relationships with the world's banks
and other financial institutions. Importantly, this provides QinetiQ
with greater access to capital and future support for an IPO than
was previously possible under complete MoD ownership.
QinetiQ's employees have demonstrated their
belief in Carlyle's strengths as an investor in their business
by committing to invest an estimated £5 million in the business
themselves.
3. Carlyle's commitment to maintaining QinetiQ's
role within the UK
Carlyle is committed to maintaining and deepening
QinetiQ's reputation as a centre for excellence in science research
and development and helping it grow to become the global leader
in this field. This can only be achieved by QinetiQ safeguarding
its capabilities and leveraging them to generate services that
customers demand. QinetiQ will remain a British company and its
success will be Britain's success.
In recognition of the sensitivity of QinetiQ's
role in the national economy Carlyle has created a special purpose
fund to support this investment. This ensures that the interests
of these investors are focused solely on QinetiQ's success and
QinetiQ is independent of any investments Carlyle has made through
other funds.
The dedicated fund is a British company subject
to UK law and its investors are predominantly institutional investors
from the UK, Europe and the US. Taken together with the MoD majority
interest and that of the staff, the beneficial ownership of QinetiQ
will remain overwhelmingly British.
Following Carlyle's proposed investment in QinetiQ,
UK national security remains protected by the same strict MoD
regulations and procedures that currently govern access to classified
material. Only those individuals with an MoD approved need-to-know
and appropriate security clearances will have access to detailed
information. No exceptions to the established procedure will be
made for Carlyle representatives on the Board or Carlyle's investors.
A further imperative for QinetiQ is the maintenance
of the Compliance Regime established with MoD upon vesting. This
Regime protects the interests of the MoD and the defence industry
by providing an exhaustive set of procedures to regulate the potential
conflict of interest between QinetiQ's MoD and commercial activities.
The Regime stipulates the need for QinetiQ to:
— preserve the confidentiality of MoD
information;
— ensure the provision of impartial
advice to the MoD; and
— comply with UK security interests.
The company is legally bound to adhere to the
Compliance Regime. Furthermore Board members all have a responsibility
to ensure the Compliance Regime is followed and the Board's Compliance
Committee performs the function of auditing compliance with the
Regime.
Finally, Carlyle and the MoD have agreed on
a Board structure that is overwhelmingly British and an information
reporting procedure that will maintain all confidences within
the company.
The QinetiQ Board will comprise of nine members.
In addition to the MoD's two representatives it will include:
Chairman—Dame Pauline Neville-Jones
Dame Pauline has worked extensively in the Foreign
and Commonwealth Office and has been Chairman of the Joint Intelligence
Committee, acting as adviser to the Prime Minister on all foreign,
defence and intelligence issues. Dame Pauline is currently a BBC
Governor, with special responsibility for the World Service and
is Chairman of the Information Assurance Advisory Council.
CEO—Sir John Chisholm
Chief Executive of DERA (previously DRA) from
1991, transforming it into a successful Trading Fund and developing
its commercial business. Previously UK Managing Director of Sema
Group PLC and before that Director of Cap Group PLC and MD and
founder of CAP Scientific Ltd in 1979. After a degree at Cambridge
in Mechanical Sciences, experience includes General Motors and
Scicon Ltd, part of BP. Non-executive directorships include Expro
International PLC and Bespak PLC. Fellow of the Royal Academy
of Engineering, the Institute of Electrical Engineers, the Royal
Aeronautical Society and the Institute of Physics.
CFO—Graham Love
Rejoined DERA in 2001. Formerly Chief Executive
of Comax PLC leading it through privatisation in 1997 before sale
to Amey PLC in 1999. Previously Finance Director of DERA from
1992 to 1996. After a degree at Cambridge in English, experience
includes management roles with Ernst & Young, KPMG and Shandwick
PLC, as well as several years in international consulting. Fellow
of the Institute of Chartered Accountants.
Hal Kruth
CEO of QinetiQ Ventures Ltd and President of
QinetiQ Inc. He joined QinetiQ from SRI International, one of
the world's leading independent research organisations where he
managed major transactions involving start-up companies, licensing,
sponsored research, joint ventures and technology spin-offs.
Non-Executive Directors
Jonathan Symonds
Chief Finance Officer at AstraZeneca PLC, which
is a global life science group with a turnover of £11.3 billion,
£1.2 billion, pretax profit in 1999. Responsible for all
aspects of finance, including financial strategy and corporate
finance, and also the global information services and investor
relations.
Glenn Youngkin
Glenn Youngkin is a Managing Director of The
Carlyle Group and leads the firm's buyout activities in the UK.
He is based in the firm's London office. Prior to joining Carlyle
in August 1995, he was a management consultant with McKinsey &
Company, where he worked on a variety of strategic and operating
issues in the energy, consumer product and healthcare industries.
Previously Glenn Youngkin structured market financings for Credit
Suisse First Boston's Natural Resource Group. He received an MBA
from Harvard Business School, where he was a Baker Scholar. He
sits on the boards of EMPI, Imagitas and Kuhlman Electric.
Sir Denys Henderson
Sir Denys Henderson has recently retired from
his role as Chairman and First Commissioner of The Crown Estate.
Previously, Sir Denys served as Chairman of The Rank Group, formerly
The Rank Organization Plc, and from 1957 to 1995 he was with Imperial
Chemical Industries PLC, serving as its Chairman from 1987 until
1995. He was also Chairman of Zeneca Group PLC from its independence
in 1993 until 1995.
His current appointments include: Member, The
Law Society of Scotland; Companion, Institute of Management; Member,
The Advisory Council of The Prince's Youth Business Trust; Fellow,
The Chartered Institute of Marketing (honorary Vice President
1989-1995); Chancellor, University of Bath; President and Chairman,
The British Quality Foundation; Member, Advisory Committee on
Business Appointments; Member, Advisory Council, Centre for Dispute
Resolution. Sir Denys is a graduate of the University of Aberdeen.
He holds an M.A, an L.L.B., and is a Solicitor. He received his
Knight Bachelor (Birthday Honours) in 1989.
4. Carlyle's partnership approach to MoD
Carlyle has a well-established track record
in Europe of marrying the corporate objectives of its partners
with the financial objectives of its investors. Accordingly, the
firm has endeavoured to be flexible on the terms of its partnership
in order to accommodate the MoD's requirements.
As a result the firm has agreed to structure
its investment so that the MoD is able to retain a majority economic
interest in QinetiQ of 62.5% that can be realised during an IPO
of the business. The British taxpayer will therefore, be the main
beneficiary of any growth in the value of QinetiQ, which Carlyle's
investment helps the business to achieve.
Although the MoD will cede control of the business
it will retain a Special Share in QinetiQ. This Special Share
allows the UK government to veto any proposed transaction or activity
that it considers would be contrary to the interests of national
security because of unacceptable ownership of or influence over
the company.
Finally, the shareholder's agreement contains
reserved matters, which require MoD approval of major strategic
decisions.
| 
