Memorandum submitted by The Blackstone
1.1 Naturally, as the Private Equity industry
has grown in the UK, so has people's desire to understand it.
Blackstone welcomes the opportunity to contribute to the Treasury
Select Committee and is committed to playing its part in increasing
understanding of the industry.
1.2 It is not in the industry's interests
for private equity to be misunderstood, nor is it in the interests
of the UK as a whole. Blackstone is hopeful that the current debate
will help to clear some of the myths around the place of private
equity in the UK's economy.
1.3 This submission gives some background
to Blackstone and explains its approach to private equity. It
then turns to some of the general questions posed by the Committee.
These general questions have also been addressed to some extent
by the CBI and the BVCA.
2. ABOUT BLACKSTONE
2.1 It is important to bear in mind at the
outset that every private equity company will have its own approach.
Blackstone buys companies and builds them, often through strategic
acquisitions, new investment programmes and organic growth. This
long-term investment strategy creates jobs. The example of Southern
Cross (see para 8.2) demonstrates how the value of such investments
continue to be felt after Blackstone realised on its investment.
2.2 Blackstone is an international investment
and alternative asset management firm. It started as a firm specialising
in Mergers and Acquisitions and rapidly became synonymous with
private equity, although it has nine different business units
globally. With a staff of over 760 it has offices in New York,
Los Angeles, Boston, London, Mumbai and Hong Kong.
2.3 Since 1987 the firm has invested in
over 100 companies in a variety of industries, countries and economic
environments. Blackstone opened a London office in August 2000
to better focus its activities in Europe.
2.4 Blackstone's founders pledged to only
invest capital in friendly situations and to support strong management
teams. The founders also decreed that the firm would always put
significant amounts of its own money into investments, thus aligning
its interests with those of its investors. Blackstone also aligns
the interests of its management teams by insisting on their personal
financial involvement in the company. Thus the rewards are directly
linked to the long-term success of those companies.
2.5 The total enterprise value of all transactions
effected up until March 1st 2007 was over $158 billion. To date,
Blackstone has raised capital across five private equity funds
(Blackstone Capital Partners I, II, III, IV, V).
Since 2000, Blackstone has been a major investor
in UK companies including United Biscuits, Tragus Restaurant Group,
Center Parcs, Merlin/Madame Tussauds, Cineworld, Southern Cross
Healthcare, Spirit/Scottish & Newcastle Pub Group, Savoy Group
3. IS THE
3.1 The regulatory environment for private
equity in the UK is robust. The existing regime has overseen a
substantial growth in private equity in the UK in a constructive
and responsible manner.
3.2 Private equity houses are fully regulated
by the Financial Services Authority. The FSA's statutory objectives
include the need to "promote efficient, orderly and fair
markets" even-handedly to all regulated investment vehicles,
including private equity.
3.3 The FSA stated in a recent discussion
paper that the current regulatory architecture for the private
equity industry is "effective, proportionate and adequately
Blackstone agrees with the FSA that regulation must balance the
needs of adequate investor protection with the need to foster
an environment which is conducive to the growth and sustainability
of the private equity sector.
3.4 Blackstone welcomes the FSA's most recent
paper on the private equity industry in which the regulator stated
that the "current approach to supervising this market is
We support the FSA's acknowledgement that high leverage levels
are not necessarily linked to lower credit and risk management
standards. Further, we have confidence that two of the main areas
of risk that the FSA identified (market abuse and conflicts of
interest) can be managed effectively and we will work with the
FSA to achieve this.
3.5 In general, Blackstone has an ongoing
dialogue with the FSA to ensure that any risks present within
the private equity sector are thoroughly understood and managed
in an appropriate manner.
4. IS THERE
4.1 Blackstone supports Sir David Walker's
aim of establishing a voluntary code of compliance regarding new
standards of disclosure and valuation. We believe that such a
code, introducing a more standardised level of disclosure, will
be in the interests of the private equity industry and all its
stakeholders. David Blitzer, Blackstone's UK Managing Director
is sitting on David Walker's working groupthe review is
expected to report in autumn 2007.
4.2 The appropriate level and form of transparency
is clearly linked to the nature of private equity's investor base.
Blackstone recognises that the interests of private equity firms,
the management and employees of private equity owned companies
and regulators are all best served by having access to accurate
and timely information.
4.3 Effective communication with investors
is a high priority for Blackstone. The Investor Relations Department
is in constant communication with investors, face to face and
on the phone. All Blackstone's investors have access to detailed,
real time information on the performance and strategy of the companies
in the funds' portfolios.
4.4 As well as ongoing daily engagement,
Blackstone holds an Annual Limited Partner Conference during which
CEOs are invited to present their company's performance and strategy.
This provides an opportunity for investors to understand and question
management's investment thesis and the growth strategy for the
firm and the effect it has upon stakeholders.
5. HAS THERE
5.1 Blackstone agrees with the European
Central Bank's recent report that there are no current systemic
risks posed by the growth of the private equity market. Clearly
though there is no need for complacency. As financial markets
evolve there is a need to remain vigilant and to adapt to changing
5.2 The amount of leverage has to be judged
in the context of a businesses' ability to service its debt. This
needs to be taken on a case by case basis as each business has
different requirements based upon its business cycle. Blackstone's
investments are based on a sophisticated understanding of both
the macro-economic climate and the potential of individual markets.
This approach has served us wellour record in the UK has
been successful, both for our portfolio companies, its stakeholders
and for our investors (a large proportion of which are pension
6. WHAT ARE
6.1 In common with the rest of the UK's
private equity industry Blackstone's limited partner structure
is designed to limit the liability of investors and to ensure
that the funds are transparent for tax purposes.
6.2 The EVCA's 2006 benchmarking report
identified a number of key features of the UK limited partnership
structure which made it an attractive vehicle for private equity
houses, including tax transparency for investors and the fact
that international investors need no local permanent establishment
in the UK.
6.3 Blackstone's funds are managed by the
firm's senior partnersthe investors, as limited partners
take no part in the management of the fund.
6.4 There are internal procedures that must
be completed before any investment is made. The first stage in
this is the "Review Committee" which analyses the risks
and benefits of a potential deal. The final decision about whether
to invest in a given company is taken by the investment committee
which is made up of Blackstone's Managing Partners.
7. IS THE
7.1 The private equity industry does not
make the tax code in the UK, it follows it. Just like the regulatory
regime, the tax regime should be aware of changing domestic and
international economic conditions.
7.2 Concern has been raised over tax relief
on debt. A key point here is that the tax deductibility of debt
is available to all companies, not just private equity.
7.3 As the Economic Secretary Ed Balls MP
recently said, it is "the international norm that interest
is in general treated as a business expense and deductible from
taxable profits for companies in any form of ownership ... 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
7.4 The Treasury are currently reviewing
the rules surrounding the use of shareholder debt where it replaces
equity in some private equity deals. We are happy to work with
the Treasury to ensure that the tax regime in this area works
7.5 Private equity has a broader impact
on the UK's economic health than may be immediately obvious. The
industry's activity creates jobs across the financial services
industry, in accountancy, law firms and the banking sector. The
mobility of the industry is demonstrated by the international
talent that private equity attracts to the UK. As the CBI have
noted, this is a key reason for maintaining the competitiveness
of the UK's tax and regulatory regime.
8. ARE DEVELOPMENTS
8.1 Typically, private equity investments
are held over a 3 to 5 year period. This compares to an average
hold period for stock across the FTSE 100 and FTSE 200 of 4 months.
8.2 Blackstone's success comes from investing
to increase the value of the companies in its portfolio. Our strategy
is to invest in the long-term future of our companies, building
on existing strengths and working with a committed team of management
and employees. To date, Blackstone has followed a "buy and
build" strategy in the UK which has seen companies continue
to prosper after its investors have seen their return.
8.3 For example, Southern Cross, acquired
by Blackstone in 2004, has continued to prosper since it was floated
in 2006. The company has best performing stock in the FTSE 250
to date this year and is the fourth best performing stock in the
FTSE 250 since it went public on July 6th 2006.
8.4 When acquired by Blackstone, Southern
Cross had 12,000 employees. The company now has 41,000 employees,
30,000 of whom are care staff and nurses.
8.5 While owned by Blackstone, Southern
Cross acquired, built and refurbished care homes across the country
and became the largest provider of care homes in the UK. The company
now operates over 570 care homes and has over 28,000 beds, up
from 7,754 beds at the time of acquisition in March 2004. Blackstone's
role played a large part in consolidating the care home sector
and raising the overall standard of care homes across the UK.
8.6 Merlin Entertainments Group is another
example of job creation. Since acquisition in 2005, Blackstone
has focussed on growing the company organically and through strategic
acquisitions. This has seen the Group's employment numbers grow
from 789 to 1300 through acquisition and direct employment.
9. TO WHAT
9.1 The success of private equity in the
UK is underpinned by a number of factors. The fact that many private
equity funds now have long and successful track records means
that the confidence in private equity as a viable asset class
has grown among institutional investors and many of these investors
have increased their exposure in this area.
9.2 As pension fund managers have increasingly
looked to access well-performing investment vehicles, private
equity funds have come to play an increasingly significant, though
as yet not widely recognised role, in helping restore the balance
sheets of occupational pension schemes.
9.3 The breakdown of investors in Blackstone's
current private equity fund, Blackstone Capital Partners V, shows
that public and corporate pension funds account for over 60% of
the total capital committed.
9.4 So while the investment base of private
equity is naturally inclined towards institutions rather than
individuals, the individual is still able to benefit from exposure
to the fund's investment returns through their pension fund managers
investing on their behalf. Thus the ultimate beneficiaries through
both public and corporate pension funds include teachers, healthcare
workers, law enforcement personnel, firefighters and a host of
other public and private employees from all walks of life.
10. WHAT ARE
10.1 The type of ownership that suits a
company will depend on the nature and age of a business as well
as its management's aspirations. This is why many firms switch
from public to private ownership and back again. Center Parcs,
for example, has seen periods under both types of ownership. In
fact, five out of our six UK portfolio companies have had periods
of private and public ownership.
10.2 There are intense pressures on managers
in both public and private companies. However, compared to public
companies, private ownership involves a distinctly different relationship
between the "investor" (the private equity fund) and
the "investee" (the private firm). This is characterised
by a streamlined reporting structure, which is made possible because
of the narrow investor base and the subsequently closer relationship
between the investor and investee. This enables alignment of the
interests of owners and managers. A private equity investor will
act as a business partner and help produce quick and effective
decisions which reflect the long-term interests of the company.
10.3 The need to act in the long-term good
of the company may involve the need to forego earnings (dividend
income) in the short-term. Typically, such a position would be
unpalatable for the shareholders of a publicly owned company.
A mature public company faced with the need to restructure, or
undertake costly long-term investment, can find that the pressures
of public status limits its ability to fulfil its potential. In
addition to this issue of ownership, there are also regulatory
requirements, for example the increasing weight of EU securities
regulation and listings requirements on public companies.
10.4 The Economic Secretary summed it up
when he said: "From the point of view of the health of the
British economyno particular form of ownership is inherently
to be preferred over any other ... The real issue for investors,
for the health of the company concerned, for those workers whose
jobs depend on the health of the company's success, and ultimately
for the economy as a whole, is how effectively that ownership
11.1 We hope that this submission is useful
in setting out The Blackstone Group's approach and in demonstrating
that, alongside the industry, we are committed to improving the
way that private equity communicates the benefits of its work
95 FSA Discussion Paper, November 2006. Back
FSA, Feedback on Private Equity Risks, June 2007. Back
Ed Balls MP, London Business School, March 2007. Back
Speech by the Economic Secretary to the Treasury, Ed Balls MP,
London Business School, 8 March 2007. Back