Select Committee on Treasury Written Evidence


Memorandum submitted by Dr Tony Golding

  My evidence relates specifically to the annual survey conducted by the BVCA on "The Economic Impact of Private Equity and Venture Capital in the UK". The eighth edition was published in November 2006. It is compiled by IE Consulting Ltd. on behalf of the BVCA. A short version of the survey can be found—though not with any ease—on the BVCA website. The full survey is obtainable on request from the BVCA. These comments relate to the short survey as this is available publicly, representing the BVCA's chosen highlights, and is almost certainly the information used by journalists and others when forming a view.

  There are several aspects of this survey that merit critical examination. A figure quoted widely in the press is that private equity-backed firms employ 19% of the private sector workforce in the UK. This figure comes directly from the Executive Summary (page 3) of the short form report available on the website, which states "It is estimated that companies that have received private equity funding account for the employment of around 2.8 million people in the UK, equivalent to 19% of UK private sector employees". In fact, this figure is highly misleading. The key words are "have received". In other words, the 19% refers to every company that HAS EVER received private equity funding, including those where private equity is no longer involved because it has exited.

  Surely a much more useful figure is the number employed by private equity backed companies at any given point in time. This would give a much truer picture of the influence of private equity on the British economy. For the first time ever, the BVCA has attempted to calculate this figure though, rather than highlighting it on page 3, it is slipped in at the bottom of page 5 under "Private equity and job creation". There is a huge difference. On a "snapshot" basis, the influence on employment is 8%. The majority of the workforce in the 19% DID ONCE work for private equity-owned firms but no longer do so. The report says: "This year we have estimated the number of people employed by companies that are currently (their emphasis) backed by private equity. This figure stands at 1.2 million for the UK—8% of UK private sector employees".

  It is pleasing to see that, in the BVCA's submission to the committee, the familiar misleading statement is not repeated but has been replaced by a statement (page 4) that "firms currently backed by private equity employ c.1.2m people" (no percentage given). The BVCA should be encouraged to quote this figure more widely, something that it seems curiously reluctant to do. The 19% figure may make the case that private equity funding has been helpful to the development of these firms—which is no doubt what the BVCA is seeking to do—but it does not reflect the specific, present impact of private equity on employment or the economy.

  A second interesting aspect of the survey is that the results are unweighted by size (size of investment, turnover, assets etc). Much use is made of the AVERAGE of the sample. For example (page 12), "Average employment growth for UK private equity-backed firms, over the five years to 2005-06, was 9% pa". Usage of averages means that small firms that grow fast pull up the percentage. What would be far more interesting is the employment growth rate by size band, but this is not revealed. Have the top 10 or 20% of investee companies by some size criterion achieved 9% pa employment growth over five years, or perhaps a somewhat lower figure? Later, the report makes it clear (page 18) that the majority of investments made by their members each year are very small, demonstrating that the use of averages seriously skews the results. In 2005, BVCA members invested £6.8 billionn in 1,305 UK companies. "Of those UK businesses invested in, 66% received amounts of less than £1 million".

  My third and final point relates to the methodology employed by the survey. Anyone coming fresh to the idea of a statistical underpinning for the private equity industry would, I think, assume that, given the highly representative nature of the BVCA (over 90% of UK private equity firms are members), the logical way to construct a database would be to ask the members themselves to contribute information. They are, after all, the controlling owners of their investee businesses and receive regular reports from them, and have easy access to all the factual information required, such as turnover, employment, size of investment, exports, profits etc.

  But, remarkably, that is not how it is done. Since its inception in 1996, the Economic Impact survey has worked on a different basis. Part of the reason for this is that the survey asks the investee companies qualitative questions, relating to the key ways in which private equity has helped the development of their business. However, the basic questions are all factual and the answers to these could easily be provided by the members of the BVCA. Instead, this factual information is obtained in an unreliable and roundabout way. The contact details of a random sample of private equity-backed businesses are compiled from information provided by the BVCA and other sources. So, instead of going directly to the members who own these firms to extract this basic information, the members are asked to take the easy route of tossing IE Consulting a random list of names for them to contact. During May-August 2006, 5,700 potential respondents were contacted (page 22). In the event, IE received 1,457 replies, a 26% response rate. This then is the shaky foundation on which the Economic Impact survey is built.

  Surely we need—and deserve—a better database than this, if we are to make well-informed judgements on the private equity industry. This inadequate information base may have been acceptable 11 years ago when the private equity industry was an obscure City backwater but it is way below what is needed today. The BVCA should be asked to construct and maintain a basic database of their members' current investments: details of investee company, investment date, size of investment, turnover, employees etc. Most of their members have some of this information on their websites already but not in a consistent form. It would not be difficult to do. Such a database would be both comprehensive and reliable, in marked contrast to what we have now. If the BVCA wishes to continue to ask its qualitative questions, it can continue the survey in its present form but as a SUPPLEMENT to the main survey. This would focus purely on factual data provided by the private equity firms themselves and not, as happens now, via random contact data at one remove.

June 2007





 
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