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“Some companies have gone private genuinely to escape stock market short-termism.”
Private equity can encourage a longer term view, and that is what the evidence suggests.
It is important to keep this debate in perspective. Private equity is still a relatively small part of the economy, but it has been growing fast in recent years. The issues that my right hon. Friend raises about risks to wider stability are serious and must be taken seriously. In a discussion paper published in November, the Financial Services Authority, the regulator of this activity, pointed to the importance of identifying potential risks that could arise from excessive leverage or unclear ownership of economic risk, and of being ready to act if necessary. The FSA also points out that such risks also arise in non-private equity ownership. We are alive to those issues.
The evidence base is not strong, because the area has not had sufficient scrutiny, but what there is suggests that private equity firms tend to hold on to companies for longer than the average length of time that institutional investors hold shares. That is academic evidence, not simply a biased view. Private equity does tend to have a negative impact on employment in the first year, but a study by Nottingham university showed that following a leveraged buy-out employment rose strongly, with employment levels 26 per cent. higher after five years. Another academic study, of more than 35,000 UK manufacturing firms, showed a substantial increase in productivity for those firms that received private equity investment.
The evidence is patchy and we must view it with caution. I do not wish to comment on individual cases, but I acknowledge that there will be examples of short-termist behaviour. However, the evidence does not suggest that the Government should take a particular view of one form of ownership rather than another. Indeed, as I have said publicly and clearly, private equity can play an important and positive role in our economy in terms of promoting long-term investment, turning companies around and providing jobs.
My right hon. Friend quoted a private equity representative as saying that of course they were out to shaft the companies in which they invested, and that does not sound like a particularly long-termist view. However if, as the academic evidence shows, it has been possible for private equity firms to release value, promote productivity and, in the medium term, create jobs, one has to wonder why the previous institutional investors had not managed to do that in the first place. The general secretary of the TUC made that point in his comments on the issue.
Mr. Gauke: The Economic Secretary makes some important points, but does he recognise that the right hon. Member for Oldham, West and Royton (Mr. Meacher) speaks not only for himself, but for a large body of opinion in the Labour party, including several trade unions? The Secretaries of State for Education and Skills and for Northern Ireland have also made anti-private equity comments, and that damages confidence in that industry in this country.
Ed Balls: The private equity industry has acknowledged that it has been insufficiently open and transparent and that has partly led to some of the problems in public commentary to which the hon. Gentleman alludes. I shall not be drawn into commenting on potential leadership or deputy leadership elections, and I have not studied all of the statements that he mentions. Concerns have been raised and it is important that they are addressed. They are being addressed in two different ways.
First, I disagree with my right hon. Friend the Member for Oldham, West and Royton that the same level of reporting is required in a listed company and in a non-listed private equity company. On the other hand, clear, consistent and complete information is important. There have been improvements in best practice, but there is further to go and that is why we welcomed the announcement that Sir David Walker—who is well qualified to do the work—is to chair an independent working party to develop a voluntary comply-or-explain code to improve the private equity industry’s transparency and level of disclosure. We welcome that review and that move in the direction of transparency, which I hope will help to allay some of the concerns that have been raised.
My second point relates to taxation. As I said, we have promoted several ways in which venture capital, and investment funds more widely, can support start-up companies and turnaround investment. They include the enterprise investment scheme, research and development tax credits and the capital gains tax taper relief. At the same time, we have been concerned that
shareholder debt may be replacing the equity element in some highly leveraged private equity funding arrangements—a form of risk-bearing equity that is being treated as debt for tax purposes. We have rules to deal with those matters but, as Members know, about 10 days ago I announced a review to look at that issue in particular so that we can ensure that the current rules applying to the use of shareholder debt in such investments, where it replaces the equity element in highly leveraged deals, are working as intended. That will help to ensure that we have a long-term and consistent view.
Ed Balls: I was about to end by commenting on the six points made by my right hon. Friend the Member for Oldham, West and Royton but I will take one more intervention.
Mr. Gauke: I am grateful to the Economic Secretary. Some of the concerns about private equity relate not to transparency or indeed to specific tax treatment but to bonuses. Does he share the view of the Secretary of State for Northern Ireland and for Wales and other ministerial colleagues about bonuses, or does he think that is not a matter for the Government?
Ed Balls: Of course it is a matter for the Government. Our objective is both to promote long-term investment in jobs in our economy and to ensure that our tax rules work fairly, which is precisely why I announced a review into the borderline issues between debt and equity. However, I want to answer the points made by my right hon. Friend the Member for Oldham, West and Royton in his Adjournment debate. If I fail to cover the points raised by the hon. Member for South-West Hertfordshire (Mr. Gauke), perhaps he will come back on them.
First, my right hon. Friend referred to taper relief as a loophole. It is not a loophole; the Government made a deliberate decision to build consensus for a longer-term view of capital gains tax legislation and operation, which is widely supported by British industry. That is why the venture capital industry refers to the UK as a prime location for investment. Given the evidence I set out earlier about why that investment tends to work to the benefit of investment in jobs, that decision is all to the good.
Secondly, my right hon. Friend made a point about staircasing. We have been careful to ensure that the rules on capital gains tax relief reward risk and long-term investment but are also fair, which is why there are limits on their application.
Thirdly, my right hon. Friend spoke about the restructuring of company pension schemes. He referred to fears that adverse developments could occur, but we set up the pension regulator and strengthened the role of trustees precisely to make sure that the interests of pension scheme members are properly protected. I hope he will join me in supporting reforms for the proper protection of pensioners.
My right hon. Friend referred to the possibility that private equity firms might be trying to obtain particular benefit by disguising remuneration as capital gains rather than income. There is a careful balance to
be struck between promoting investment reward and risk and making sure that the tax system operates fairly, and we keep it under review at all times. It is well known to Members that since February 2006 we have been looking at how employment-related securities carrying interest apply, but over the past decade I think we have been striking correctly the balance between fairness and the promotion of jobs and investment.
Fourthly, my right hon. Friend referred to the importance of greater transparency. That is why we welcomed Sir David Walker’s code and why we legislated in the Companies Act 2006 for more broad-based disclosure by medium and large companies.
Fifthly, my right hon. Friend asked that the provision of tax relief for leveraged buy-outs should be ended and suggested that in so doing we should disadvantage private equity in the tax system relative to other forms of ownership. As I made clear in a speech 10 days ago, that will not be the Government’s approach. In fact, having quoted the TUC, I shall now refer to the words of the deputy director general of the CBI who said that ending the relief for interest costs
“would seriously damage long-term investment by UK companies both large and small”.
That is not a mistake we intend to make.
Finally, my right hon. Friend calls for greater transparency in the run-up to takeovers. As I said, in the Companies Act and in supporting the disclosure code we encouraged a greater spirit of openness and transparency in the private equity industry so that the general case can be made for the impact of those qualities on investment and job creation.
Mr. Meacher:
I appreciate the great detail with which the Minister has gone into my arguments and his very fair and balanced answers. On the last point, however, I did not ask for greater openness. I said that in the course of major and important takeovers, which can have massive effects on employees of the said company, there should be a requirement for a public statement or certificate that sets out what the private equity firm intends in respect of employment, pay, terms and conditions over a stated period—it cannot, of course, be indefinite—as well as in respect of debt, investment
and the long-term future of the company. Given the importance and power of these companies and their significant role within the overall economy, it is reasonable that they be required to do that. Does my hon. Friend agree and, if so, should it not be enforceable?
Ed Balls: I made the point that I welcomed Sir David Walker’s review into greater disclosure. I also think it right that the new business review will expand the information available to stakeholders, employees and the wider community. I do not think it right, however, to have a particular set of rules that disadvantage private equity companies relative to other parts of the economy. My right hon. Friend makes a broader point about disclosure, and I would expect, as the evidence suggests, that any company genuinely seeking to add value would want to have a consensus in the workplace, as well as with customers, as to the actions that are needed to turn a company around and promote greater investment and jobs in the medium term. I do not believe it right for us to impose a particular set of rules on private equity in that particular area that differ from those that are applied more broadly in the economy.
To conclude, I hope that I have shown both in my speech of 10 days ago and in tonight’s debate that we take very seriously the points made on all sides of the House and all sides of industry regarding this matter. There are actions that need to be taken by private equity companies themselves, and we are closely watching developments in the area of disclosure; there are actions that the Government can take, and I have alluded to our tax review; and there are actions that need to be taken in the wider economy to ensure that shareholders, institutional investors and companies take a more long-term view of their responsibilities. In my view, that is the way to promote long-term growth in employment in our economy. We should not demonise a particular sector, but instead promote more long-term growth and job creation in our economy. That is the approach that will continue to guide this party in government.
Adjourned accordingly at twenty-three minutes to Nine o’clock.
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