Memorandum submitted by the Carlyle Group
The Carlyle Group is pleased to have the opportunity
to submit evidence to the Treasury Select Committee inquiry into
The Carlyle Group is an international private
equity firm that invests in buy-outs, venture and growth capital,
real estate and leveraged finance in Asia, Europe and North America,
focusing on telecommunications & media, energy & power,
technology & business services, automotive & transportation,
consumer & retail, aerospace & defense, healthcare, industrial
and infrastructure. Nearly half of our investors are pension funds
and endowments; across the world, over 40 million pensioners benefit
from Carlyle investments.
Carlyle's buyout funds control four UK companies.
These are: Britax Childcare (child safety car seat manufacturer);
Ensus Group (currently constructing a bioethanol production facility
in Teesside), Firth Rixson (Sheffield-based manufacturer of speciality
metal products) and IMO Car Wash Group (operates conveyor system
We have six venture and growth capital investments.
NP Aerospace (technical composite molding business in Coventry);
FRS Global (regulatory and compliance systems provider); The Mill
(advertising visual effects group); ACIS (real-time passenger
information for the transport industry); Bfinance.com (investment
management selection services) and Globalmedia (web marketing
In total, these investments amount to an equity
value of £460 million, and employ 2,300 people.
Carlyle agrees with the FSA's feedback
to Discussion Paper 06/6 Private Equity: A discussion of risk
and regulatory engagement, published in November 2006. The FSA
concluded that "regulation of the private equity market is
both proportionate and effective". More recently, on Monday
11 June, the FSA concluded that private equity is "an important
and growing part of a dynamic and efficient capital market."
At Carlyle, we have always been open
and transparent with our investors. We also have a strong track
record of communications with the employees, customers and suppliers
of the UK companies in which we invest. We are aware that as the
private equity industry has grown in the UK, so too has the need
for us to reach out to society at large. For that reason we welcomed
the establishment of an industry working group, chaired by Sir
David Walker, which will investigate ways in which we can address
the need for wider engagement.
We do not believe that recent private
equity transactions have exhibited an "excessive" level
of leverage. Lenders and borrowers are both highly sophisticated
and experienced in calculating risks inherent in the capital structure
deployed in any business. Extensive due diligence is carried out
for every private equity transaction and credit risks are syndicated
So far as taxation is concerned,
the same tax rules apply to Carlyle's portfolio companies and
employees as to the whole economy, without any special concessions.
As such, we are subject to a range of UK tax legislation, from
corporation tax, employment taxes, capital gains tax and VAT.
The current capital gains tax regime
was put in place by the Government to encourage entrepreneurship,
stimulate economic growth and increase productivity. It has been
extremely successful in delivering on those objectives, so much
so that other European countries are now following Britain's example
and cutting tax rates to attract private equity. Any change in
the overall tax burden for private equity in the UK needs to be
seen in the broader context of global competition. As the CBI's
submission to the Treasury Select Committee identifies, the UK's
tax regime for private equity has eroded on a relative basis in
The economic climate has been favourable
to the private equity industry in the UK over recent years, which
in turn has resulted in a wider period of stability and growth
for the economy as a whole. A stable economic climate allows us
to invest in a large range of businesses, increasing productivity
and creating value across a broad spectrum of investments.
3. THE REGULATORY
(a) Is the current regulatory regime
for private equity funds suitable?
Carlyle is regulated by the Financial Services
The FSA published Discussion Paper 06/6 "Private
equity: a discussion of risk and regulatory engagement" in
November 2006. The FSA concluded that its "current regulatory
architecture is effective, proportionate and adequately resourced".
Carlyle agrees with these findings along with the FSA's most recent
comments, published on Monday 11 June, that private equity is
"an important and growing part of a dynamic and efficient
(b) Is there sufficient transparency
on the activities, objectives and structure of private equity
funds for all relevant interested parties?
Carlyle is already transparent and engaged with
our investors, reporting quarterly to all investors and providing
verbal semi-annual updates to the larger investors. We recognise
that the climate in which the industry operates has changed in
recent months and there is a need to expand our transparency beyond
these immediate stakeholder groups to society at large. We welcomed
the BVCA's announcement of the establishment of a working group
led by Sir David Walker, to review transparency and disclosure
in the industry as a whole.
(c) Has there been evidence of excessive
leverage in recent transactions and what systemic risks arise
We do not believe that recent private equity
transactions have exhibited an "excessive" level of
leverage. The increased level of leverage employed in recent transactions
is a function of a stable, relatively low interest rate environment
and the greater supply of debt from banks and lending institutions.
It is also a function of the very low rate of defaults on leveraged
loans. The use of debt is fundamental to achieving the lowest
cost of capital for any business. The key question is whether
the company is able to sustain its debt servicing and so meet
payments of interest and principal. This is subject to careful
analysis by both the equity investor and debt providers, both
of whom are sophisticated financial investors.
The question of systemic risk has been recently
assessed by the European Central Bank, "Large Banks and Private
Equity Sponsored Leveraged Buy-outs in the EU" (April 2007).
Carlyle agrees with their conclusion that the creation of systemic
risk in the banking sector as a result of leveraged buy-outs is
(d) What are the effects of the current
corporate status of private equity funds, including both their
domicile and ownership structure?
Funds are structured from an ownership and domicile
perspective in order to optimise the returns for investors, a
large proportion of which are pension funds. The limited partnership
structure which dominates in private equity ensures that investors
have limited liability, so that they are not exposed beyond their
commitment to the fund.
Is the current taxation regime for private equity
funds and investee firms appropriate?
The same tax rules apply to Carlyle's portfolio
companies and employees as to the whole economy, without any special
concessions. As such, we are subject to a range of UK tax legislation,
from corporation tax, employment taxes, capital gains tax and
The private equity industry has been able to
grow in the UK in recent years due to strong sponsorship from
the government. Any shift in the tax system, at a time when other
European countries are coming into line with the British perspective,
could put the UK at a disadvantage and so needs to be examined
in a broader economic context. Indeed, a recent European Venture
Capital Association survey comparing the attractiveness of various
countries highlighted that the UK has lost some ground to other
European Union nations such as France and Ireland.
5. THE ECONOMIC
(a) Are developments in the environment
and structure of private equity affecting investments in the long-term?
Private equity invests for long term, seeking
to create value in companies over an ownership period of around
three to five years. This investment style contrasts with the
public markets where investors tend to trade their holdings more
frequently and whose judgements of company performance are frequently
driven by quarterly or bi-annual financial reporting and a daily
movement in share price.
(b) To what factors, including the
current macroeconomic context and position in the economic cycle,
is the current rise of private equity attributable?
There are several contributory factors to the
rise in private equity. First, it has been shown over the long-term
to outperform public markets and produce excellent returns for
investors, and their enthusiasm for the private equity asset class
has been demonstrated by the continual rise in capital committed
by many thousands of pension funds, endowments, corporations,
financial institutions and individual investors.
Private equity's contribution to economic growth
and productivity through its investment in enterprise and innovation,
and support for companies in need of turnaround away from the
public markets, has been increasingly recognised.
(c) What are the economic advantages
and disadvantages of a firm being owned by private equity funds
as opposed to being publicly listed?
We believe there are a number of economic advantages
of a company being owned by private equity. Through common incentives,
employees, senior management and shareholders share the same desire
to achieve the best possible results for the company. This close
alignment of interests enables management and shareholders to
execute their vision for the business efficiently and over the
appropriate time period. Private equity investors provide strong
support through a combination of experienced strategic advice
and practical financial backing.
An illustrative example is our investment in
the Ensus Group, acquired in March 2007. Ensus has been established
to produce fuel grade bioethanol for use in the European transport
industry and plans to build a number of world-scale facilities
across Europe. Construction began in May 2007 on its first bioethanol
production facility in Teesside, which is expected to generate
100 permanent jobs and 800 jobs during construction. During 2006,
Ensus had attempted to raise finance from public market investors
but had struggled to complete an initial public offering due to
changeable investor sentiment towards the renewable fuels sector.
Ensus welcomed the approach by Carlyle in late 2006; as an experienced
biofuels investor, Carlyle was able to move the transaction forward
extremely quickly and efficiently, enabling Ensus to keep to its
originally planned development timetable, upon which it had built
important partnership agreements with Shell, Glencore and others.
Carlyle has appointed Ensus board members with
experience of the similar projects in the US bioethanol industry,
which is more advanced in its development than in the UK.
Carlyle has helped the business in focusing
attention on interaction and engagement with external stakeholders.
Carlyle introduced Ensus to a leading academic institution that
is to undertake technical analysis on biofuel carbon footprints,
providing practical data to support Ensus in its efforts to shape
a supportive environment for the industry.
Ensus has garnered the support of both national
and local political communities. Local MP Vera Baird and Transport
Minister Stephen Ladyman both voiced their support of the Ensus
investment. In May 2007, Environment Minister David Miliband spoke
of his backing for the renewable fuels industry to a large audience
of local councillors, trade bodies and partners attending a ceremony
to mark the beginning of construction of the first Ensus plant.
Carlyle has agreed additional funding to address
an adaptation to the plant's construction layout in order to improve
operational performance. Carlyle is lending full support to Ensus
in plans to develop the business into a pan- European provider
with the roll-out of additional facilities in continental Europe,
leading to further job creation and facilitating the realisation
of European green energy objectives.