Select Committee on Treasury Written Evidence


Memorandum submitted by the Association of Corporate Treasurers (ACT)

RESPONSE

  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 areas

THE REGULATORY ENVIRONMENT

Is the current regulatory regime for private equity funds suitable?

  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 mechanism.

Is there sufficient transparency on the activities, objectives and structure of private equity funds for all relevant interested parties?

  It is not clear whether transparency is being used in this context to address concerns that have merit—eg adherence to statutory disclosure regimes—or 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 have merit.

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 commentators—such as Standard and Poor's—have 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.

TAXATION

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.

THE ECONOMIC CONTEXT

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 equity investment.

What are the economic advantages and disadvantages of a firm being owned by private equity funds as opposed to being publicly listed?

  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

CONCLUSION

  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 noted—and responded to—the recent FSA discussion paper (dp06—06) regarding private equity and market risk. We would support moves to engage further with the private equity industry and its representatives through these discussions.

  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.

May 2007





 
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Prepared 22 August 2007