Select Committee on Treasury Written Evidence

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 private equity.

  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 car washes).

  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); (investment management selection services) and Globalmedia (web marketing company).

  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 widely.

    —  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 recent years.

    —  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.


 (a)   Is the current regulatory regime for private equity funds suitable?

  Carlyle is regulated by the Financial Services Authority.

  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 capital market."

 (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 in consequence?

  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 remote.

 (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 VAT.

  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.


 (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.

June 2007

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