Memorandum submitted by the Association
of Corporate Treasurers (ACT)
The ACT's view is that that private equity can
enhance capital market efficiency and can widen the availability
of capital, identify companies with significant growth potential
and facilitate their transformation. We do not believe that there
are material gaps in the current regulatory regime which would
require substantial changes in the attitudes of policy makers.
The Committee asked for specific written evidence in the following
Is the current regulatory regime for private equity
It is our view that there is no need for a separate
private equity regulatory regime and that oversight from the FSA
under existing legislation and procedures remains the appropriate
Is there sufficient transparency on the activities,
objectives and structure of private equity funds for all relevant
It is not clear whether transparency is being
used in this context to address concerns that have meriteg
adherence to statutory disclosure regimesor to seek to
control legitimate investment and capital market transactions
which other parties dislike or disapprove of. We consider that
there is sufficient transparency in respect of the concerns that
Has there been evidence of excessive leverage
in recent transactions and what systemic risks arise in consequence?
There is no definitive academic or professional
agreement on what constitutes appropriate leverage for individual
enterprises. Hence the question of "excessive" is not
an objective standard. In addition there is no evidence as to
the impact of failed leverage on market risk. Some professional
commentatorssuch as Standard and Poor'shave recently
expressed their concerns on likely rising levels of corporate
debt defaults; however current levels of corporate default remain
at historic lows.
What are the effects of the current corporate
status of private equity funds, including both their domicile
and ownership structure?
Providing the regulatory regime to which they
are subject has full access to the information it requires, there
is no evidential reason to be concerned with domicile or ownership.
Is the current taxation regime for private equity
funds and investee firms appropriate?
We would expect the tax regime to be neutral
between public or private enterprise owners/shareholders. The
only we are aware of that the current tax regime is either inappropriate
or overly favourable to private equity funds or investee firms
is in respect of FA 1996 Sch 9 para 13 which HMRC might consider
a constraint on the retirement of existing equity by existing
management but which might not apply to private equity buyers.
Are developments in the environment and structure
of private equity affecting investments in the long-term?
There is no empirical evidence to suggest private
equity ownership has a negative effect on "long-term"
investment. In fact the normal private equity model relies on
a realisation of the investment either through a public flotation
or trade sale in three to seven years. There is therefore every
incentive on the private equity owners to ensure that their businesses
remain viable in the longer term.
To what factors, including the current macroeconomic
context and position in the economic cycle, is the current rise
of private equity attributable?
Private equity is one example of increasingly
wealthy investors seeking diversification in their portfolios
beyond traditional equity and bond markets. To the extent that
low interest rates have benefited corporate activity through a
low real cost of post-tax debt, this is not confined to private
What are the economic advantages and disadvantages
of a firm being owned by private equity funds as opposed to being
There are considerable arguments deployed by
proponents of both of these forms of investment to recommend their
use. The ACT's view is that investors should be free to choose
between competing forms of asset allocation based on their own
investment criteria. Public and private merger and acquisition
activity involving a particular approach to management and finance
of a portfolio of companies is not a new phenomenon
We have noted the recent moves by the BVCA and
others to inquire into creating a code of conduct for private
equity firms. We also notedand responded tothe recent
FSA discussion paper (dp0606) regarding private equity
and market risk. We would support moves to engage further with
the private equity industry and its representatives through these
The Committee might however wish to consider
the role of traditional "buy and hold" instutional investors
in the exercise of their fiduciary duites to their clients. It
might appear that these institutions have nor been exercising
their shareholder powers to encourage public company mangement
to run their companies to best advantage in terms of the business
strategies and the financing models. This seems to be evident
in that private equity values companies at levels above those
prevailing in the public markets.