Memorandum submitted by Permira Advisers
1. Permira Advisers LLP welcomes the opportunity
to contribute to the Treasury Committee inquiry into private equity
2. Permira is an international private equity
firm. It has a staff of around 200 with operations in Frankfurt,
Guernsey, London, Luxembourg, Madrid, Milan, New York, Paris,
Stockholm and Tokyo.
3. The Permira funds' focus is on investing
in large companies that are not fulfilling their potential and
would benefit from a period of private equity ownership. The value
created in these businesses by the changes effected during this
stage in their lifehelping them to become stronger, more
competitive and sustainablein turn generates the return
for the funds' investors.
4. Permira has raised and advised funds
with a combined total of more than 21 billion over the last
20 years. The most recent fund received commitments from more
than 70 public and corporate pension funds, more than 40 charities
and endowments, more than 20 life insurance companies and eight
governmental development agencies. The fund has more than 30 million
underlying pension fund beneficiaries, including approximately
one million current and former UK local authority employees. By
geography, some 55% of the capital committed to the most recent
fund came from European institutions, 35% from North American,
8% from the Far East and 2% from the Middle East.
5. Since 1985, the Permira funds have completed
more than 180 private equity transactions. The Permira funds are
currently invested in around 30 portfolio companies based in Europe
and the US and with operations around the world. Examples include
New Look, Gala Coral, Birds Eye, AA, All3Media and Principal Hotels
in the UK; SBS Broadcasting, Dinosol and Borsodchem in Continental
Europe; and Intelsat and Aearo Technologies in the US.
Is the current regulatory regime for private equity
6. In the UK, Permira is regulated by the
Financial Services Authority ("FSA") through its authorisation
of our regulated activities of investment advice and management.
7. The FSA's discussion paper "Private
equity: a discussion of risk and regulatory engagement" does
identify and attempt to assess the impact of some key risks for
the private equity industry. Permira's view is that this paper
represents a reasonable and balanced description of the private
equity industry in the UK, and in particular the risks inherent
in the industry. As part of the consultation process, Permira
has commented on some of the key areas in the report. Permira
agrees with the FSA's own conclusion that its current approach
to supervision is broadly the correct approach.
Is there sufficient transparency on the activities,
objectives and structure of private equity funds for all relevant
8. The recently appointed working group
lead by Sir David Walker will review the transparency and disclosure
in the private equity industry in general, and how levels of disclosure
could be improved. Permira fully supports this initiative.
9. However, with regard to investors, Permira
believes it communicates with a high level of transparency and
openness. There are specific and detailed requirements set out
in the fund legals as to information which the investors are entitled
receive. In addition the investors in the Permira funds receive
regular updates on the activities and performance of both the
investee companies and of the fund itself. There is an annual
meeting of the investors in each fund at which the performance
of the fund is presented and discussed and the investors receive
annual audited accounts of the funds. In addition, each fund has
an advisory board composed of representatives of its largest investors.
10. Permira's most recent fundraising lasted
approximately six months. During this time investors were able
to meet all of Permira's senior investment professionals, were
able to submit detailed questionnaires about all aspects of the
firm, conduct detailed due diligence on the firm's track record,
as well as being able to call on advice from highly sophisticated
investment consultants. Our investors' satisfaction with the information
they receive is reflected in the high rate of reinvestment in
our funds; approximately 90% of the investors by weight of capital
in our first European fund, raised in 1997, reinvested in our
most recent fund.
11. In the case of the other financiers
of private equity-backed companies, such as the debt providers,
we believe that the disclosure is adequate and is dealt with in
the very detailed information requirements set out in the loan
Has there been evidence of excessive leverage
in recent transactions and what systemic risks arise in consequence?
12. There is clear evidence that leverage
levels have been increasing over the last few years. This has
been driven by a rise in the supply of debt from financial institutions
and the improved economic environment.
13. However, Permira does not believe that
these higher leverage levels should necessarily be regarded as
excessive. The appropriateness of leverage should be seen in the
context of the ability of the business to service the debt. Equally,
at the same time as the leverage levels have been increasing,
the cost of debt has been falling.
14. Permira does not believe that there
is any systemic risk from current levels of lendingthe
lending is syndicated widely amongst a large number of banks and
a vibrant institutional fund community, meaning that individual
company risk is widely distributed. We are focused in achieving
the right balance between an efficient capital structure that
is low cost and the financial flexibility for each company to
grow and develop.
15. Permira agrees with the conclusion of
the ECB's recent report ("Large Banks and Private Equity-Sponsored
Leveraged Buy-Outs in the EU" April 2007) that the likelihood
of LBO activity posing systemic risks for the banking sector in
the region appears remote.
What are the effects of the current corporate
status of private equity funds, including both their domicile
and ownership structure?
16. Most private equity funds are established
as limited partnerships. The key reasons for this are in summary:
firstly, to ensure that the investors in the funds have limited
liability status so that their maximum exposure to the fund is
limited to the amount of their commitment; and, secondly, to ensure
that the funds are transparent for the purposes of tax. The investors
in the fund are limited partners and take no part in the management
of the fund. The management of the fund is carried out by the
general partner of the fund.
17. The investment by the Permira funds
in a company has no effect on the corporate status or domicile
of the investee company itself. After the investment has been
made, the investee company and its management will continue to
be domiciled in the same place they were before the investment
Is the current taxation regime for private equity
funds and investee firms appropriate?
18. As mentioned above, many private equity
funds are established as limited partnerships. From a taxation
perspective, these limited partnerships are fiscally transparent,
which has the effect that the investors in the funds are taxed
on their investment in the fund as if they had invested directly
into each investee company of the fund. This is important for
investors such as pension funds and charities which are taxed
on a different basis from companies and individuals and, for good
reason, in many cases pay no tax or lower rates of tax. For other
investors who pay tax on a conventional basis, the fiscally transparent
nature of the partnership structures avoids their investment returns
being taxed twice.
19. Private equity-backed companies are,
and should continue to be, taxed on the same basis as other companies.
20. On the particular issue on tax deductibility
of interest, we agree with the recent comments by Ed Balls MP,
Economic Secretary to the Treasury:
"There is of course nothing specific to
private equity in the tax deductibility of interest. Any kind
of company can claim it, and most quoted companies do. It is also
the international normthat interest is in general treated
as a business expense and deductible from taxable profits for
companies in any form of ownership."
21. Accordingly we believe that the taxation
of investee companies continues to be appropriate.
Are developments in the environment and structure
of private equity affecting investments in the long-term?
22. The Permira funds are structured to
reflect the long-term nature of their investment activity. They
are closed-end funds that require the investors to commit their
capital for 10 years. The first six years are described as the
investment period and the subsequent four years are described
as the realisation period. There is generally no significant recycling
of the capital, reflecting the intention of making long-term investments.
The structure of the funds makes them one of the longest term
sources of investment capital in the market.
23. On average, the Permira funds are invested
in their portfolio companies for approximately five years. This
compares with an average holding period for public market investors
of around 12 months.
24. The length of holding period depends
on the nature of the investment plan for the business in question.
In the case of Hogg Robinson, for example, the Permira funds held
the business for more than six years so as to be able to back
the management in effecting a complex transformation and repositioning
of the company. This involved separating the travel management
business from the back office services business; building a strong
presence in the firm's key markets of North America, continental
Europe and South East Asia both organically and by acquisition;
expanding its activities in the US; designing, building and implementing
a new IT system that would allow it to fulfil international travel
planning demands; and eventually listing the company on the London
25. The length of investment period also
allows the Permira funds to back substantial and challenging capital
expenditure investment programs. In mobile satellite business
Inmarsat, for example, the Permira funds along with a partner
supported a $1.5 billion investment program culminating in the
launch of new satellites. In one of the Permira funds' most recent
investments, the Hungarian chemicals business Borsodchem, the
core of the investment thesis is built around a 500 million
capital expenditure program that will considerably increase the
firm's production capacity.
26. Developments in the industry, such as
growing fund sizes or deepening credit markets, have not affected
our fundamental long-term perspective on the investments the Permira
funds make; the developments have not had any bearing on the speed
with which change can be successfully implemented in a business.
To what factors, including the macroeconomic context
and position in the economic cycle, is the current rise of private
27. In Permira's view, the recent rise in
the scale of private equity activity is attributable to both supply
side and demand side drivers.
28. On the supply side, there has been a
big increase in the appetite among institutional investors globally
for investment in private equity. The highly positive experience
of longstanding investors such as pension funds of the strong
performance produced by the asset class has been reflected both
in the increases in fundraising and the increases in allocations.
This has been supplemented by an expansion in debt markets, with
the effect of making it possible to structure larger transactions
than in the past.
29. On the demand side, there have been
a number of important long-term drivers that have combined to
provide productive investment opportunities for private equity
firms. In the first instance, private equity has shown itself
to be a capable part of mainstream merger and acquisition activity
that can support the ongoing process of corporate deconglomeration.
Private equity buyers have the preparedness to take on business
challenges, such as turning around underperforming or unfocused
companies, which many other businesses lack.
30. Similarly, private equity is equipped
to play a role in distressed business situations and in helping
disentangle family and succession issues where other sources of
finance are not relevant. This has created a number of our recent
investment opportunities. For example, the Permira funds invested
in the heavily loss-making German pay-TV business Premiere, helping
to dramatically turn around its performance and restore it to
31. Furthermore, European integration, globalisation
and the speed of technological change have intensified competitive
pressures on business. This, in turn, has expanded the demand
for the sort of long-term investment and support provided by private
equity. In effect, private equity firms are specialists in helping
businesses through difficult periods of profound change.
What are the economic advantages and disadvantages
of a firm being owned by private equity funds as opposed to being
32. Private equity benefits the UK economy
by building strong, sustainable and fast-growing businesses.
33. Permira believes that the key feature
of private equity that makes it a positive agent for change is
the attractive form of governance that it represents, particularly
in comparison with public markets. It offers:
Shortened lines of communication
between shareholders and managers.
The ability to implement major change
programmes and long-term strategic initiatives away from the shorter-term
pressures imposed by public markets.
Easier access to further funding.
Close alignment of interest between
active owners and highly incentivised management.
34. Permira has repeatedly demonstrated
its value as a catalyst for positive change in businesses and
industries going through periods of rapid transformation. This
is relevant both for businesses that have been publicly listed
and for those that have been part of a larger conglomerate or
35. In the media sector, for example, where
technological change is having a major impact on business models,
the Permira funds have invested in companies such as Premiere
and Prosiebensat1 in Germany, and SBS Broadcasting in the Netherlands.
In the telecommunications sector, similarly impacted by technological
change, the Permira funds have backed Inmarsat in the UK, Intelsat
in the US, and debitel in Germany.
36. In the consumer sector, where changing
patterns of consumer spending and customer expectations have created
substantial pressures on established businesses, the Permira funds
have invested in Homebase and Birds Eye in the UK, Cortefiel,
Dinosol and Telepizza in Spain, and a number of others in related
areas. The common theme across all these sectors has been the
pressure they felt from forces of change, whether international
competition, technology or shifting consumer behaviour.
37. Permira believes that it has also demonstrated
its value in backing businesses that are positioned to grow very
rapidly, either organically or by acquisition. Recent examples
include fashion retailer New Look, which has opened a million
square feet of new retail space and created more than 3,000 new
jobs since acquisition; budget hotel chain Travelodge, which opened
104 new hotels and created more than 2,000 new jobs under the
Permira funds' ownership; bingo business Gala, which the Permira
funds and partners backed in its acquisition of bookmaker Coral
to create one of Europe's leading gaming businesses and one of
the UK's largest private companies that now employs more than
18,000 people; and Italian boat builder Ferretti, which was backed
by the Permira funds in making more than ten acquisitions to become
a world-leading luxury boat businesses.