Select Committee on Treasury Written Evidence

Memorandum submitted by Mr Paul Myners

  1.  I submit this paper to the Committee in a personal capacity in response to its request to me for evidence. The paper does not necessarily reflect the view of any organisation with which I am associated.

  2.  I am Chairman of Land Securities Group, Guardian Media Group, the Low Pay Commission and Tate. I am a member of the Court of the Bank of England.

  3.  My career has involved me in numerous contacts with private equity. Specifically, I have chaired two private equity companies that specialise in mid-cap MBOs (Gartmore Ventures and Bridgepoint) and I am on the advisory board of a specialist mid-cap private equity manager (Englefield—investing Euro 30-150 million per transaction). I sit on the board or investment committee of a number of institutions which invest in private equity funds, including Singapore's Government Investment Corporation, and have personal monies invested in private equity, directly and indirectly. I have chaired a company which was established with private equity backing and which now has a New York Stock Exchange listing (Aspen Insurance). The Guardian Media Group has an important division in which private equity investors have a minority shareholding and I chaired the Board of Marks & Spencer which received a potential takeover bid backed by private equity.

  4.  I was asked by the Chancellor of the Exchequer in March 2000 to carry out a Review into institutional investment including, inter alia, private equity. I reported in March 2001.

  5.  In this Review I concluded that private equity had tended to be overlooked as an asset class by UK institutional investors. I explained why I thought this was the case and set out a number of actions which addressed the situation and encouraged UK pension funds and others to take a greater interest in this asset class. These actions were largely for trustees and their advisors.

  6.  I noted that private equity had a history of mixed returns with a wide dispersion of outcomes and observed that the industry was developing an increasing range of styles and segments. I also noted that US Investors had been a significant source of private equity funding, including the funding of UK private equity partnerships. UK institutions had remained on the sidelines (at the time of writing the Review they were subscribing a reducing percentage of capital for new UK private equity partnerships).

  7.  I made a number of technical recommendations, all of which were accepted and actioned by HMT, the FSA and others.

  8.  The Review also included a recommendation that encouraged the UK private equity industry to make more effort to explain its activities and economic contribution and identified the need to enhance confidence in the information supplied about private equity portfolios and fund performance "to overcome considerable mistrust on the part of many UK institutions" [paragraph 12.89].

  9.  The taxonomy of private equity is wide, extending from pure early stage venture capital to mega funds making leveraged bids for large public corporations.

  10.   Private equity owners can and do make employees redundant, cut back on research and development and default on debt. So do public equity and other forms of commercial ownership, including sole traders, partnerships and family firms. It is not sensible to say that one form of ownership is superior to others in terms of public policy or economic efficiency. In fact the similarities between different forms of ownership are far clearer than the differences. Most forms of ownership are symbiotic. An economy will benefit from a plurality of choice.

  11.  The distinctive features of private equity as a form of ownership are:

    i.  Funds tend to have a finite life which requires that underlying investments are sold or distributed prior to wind up.

    ii.  The chain of ownership and communication is short by comparison with public equity.

    iii.  Fund investments tend, though not always, to be leveraged by debt to accentuate returns.

    iv.  The investment approach is research intensive and portfolios are more concentrated than public equity portfolios.

    v.  The management expense is high and includes the potential for significant reward for superior returns.

  Observers have noted that the average holding period for investments in private equity portfolios is longer than the average for public equity portfolios. In my view the length of holding period is not a matter of public policy interest with long holding periods not necessarily preferable to shorter ones. The data for public equity average holding periods is also severely distorted by the impact of algorithmic and programme trading. The private equity industry is tempted to misuse this data to support an impression of virtue.

  12.  The returns to private equity investment exhibit substantial variation over both time periods and between different managers, or general partners, and between styles and specialisations. I covered this in some detail in my Review—paras. 12.48-12.63. Independent academic studies (HEC, Paris, and the National Bureau of Economic Research) suggest that on average private equity funds have produced inferior returns to public equity funds over most periods. Manager, or general partner, selection is more important in determining outcomes than for most standard public equity mandates. The best private equity funds have produced very good returns; a significant number have disappointed, some very badly. More recent experience has evidenced better relative returns from private equity funds, possibly reflecting benign economic conditions, a current abundance of credit and favourable exit valuations. One would expect private equity to produce superior returns to public equity over all time periods to compensate for the former's higher risk as a result of portfolio concentration and greater use of debt combined with a premium to compensate for the absence of liquidity and influence. That is to say, investors should require higher returns to compensate for higher risk. Private equity has not always produced superior risk adjusted returns. By one measure of risk, volatility of value, private equity may appear less risky than public equity. This is counter intuitive and probably a reflection of valuation smoothing by private equity rather than genuinely lower volatility in value.

  13.  Interestingly, venture capital (the financing of business start ups and early stage investment) has consistently produced poor returns on average. This is one type of private equity investment which relies almost exclusively on business management skill (such funds make little or no use of debt and do not generally exit into a third party transaction at an early stage). This observation might have some relevance to discussion on the relative attractions of private equity and the skills of general partners.

  14.  Private equity investors use three principal levers to produce their targeted returns:

    i.  Improved operational performance from portfolio investee companies.

    ii.  The use of debt gearing to enhance equity returns and reduce corporation tax.

    iii.  Expansion in the valuation multiple, ie the rate at which earnings are valued between purchase and sale.

  15.  Different styles or segments of the private equity industry will be more or less reliant on each of these three levers with external factors, particularly credit availability and stock market confidence, influencing the importance of each in different time periods. It is not possible to say with confidence which of these factors makes the greatest contribution to performance, although it is fair to conclude that both the use of debt and multiple expansion must have benefitted significantly from the economic stability of the last decade and high levels of credit availability over the last few years. To put it another way, current returns from certain types of private equity may owe quite a lot to external factors.

  16.  In my experience the private equity industry has been poor at explaining the source of portfolio and individual investment performance although I understand that increasing interest from UK pension funds has led to investment consultants and fund of private equity funds investors seeking greater insight into performance attribution. This is an area which deserves to receive consideration by the working party established under Sir David Walker (see paragraph 30).

  17.  Given previously low levels of interest by investors in understanding sources of portfolio and individual investment performance, it is not altogether surprising that it is difficult to find any reliable data on the economic impact of private equity. Evidence that has been produced has tended to be inconsistent and/or lacking in completeness or independence. I am not troubled by this. It is my view that no form of ownership is inherently superior to another and that, accordingly, one is unlikely to prove beyond doubt that private equity is, say, better at creating jobs or growing sales than, say, public equity. Private equity, like other forms of ownership, has the good and the bad.

  18.  That said, it can be argued, all other things being equal, that a substantial increase in indebtedness is likely to be associated with increased risk for some or all of employees, suppliers, customers and others who are at risk to the indebted party. This might give rise to public policy concerns although in my judgement the appropriate response should be left to the party at risk to determine. It is also worthwhile noting that running business with excessive equity capitalisation or an unproductive work force represents a poor allocation of scarce resource. It seems to me that in general terms the level of debt within a business is a matter best determined by the owners and managers of that business and should not be an issue for Government save in respect of regulated business, monopolies and quasi monopolies and companies or organisations of national significance or where the overall consequences are material in terms of the tax base. It also needs to be remembered that an interest offset against taxable profits in the hands of a borrower represents a taxable interest income for the lender, although this simplified model fails when the lender is a non-taxable entity or based offshore, as many now are.

  19.  The issue of "employee voice" (ie the opportunity to express a view or more) has much broader significance than for private equity alone. Employees in a company acquired by private equity may have little "voice" and do not generally fall under the provision of TUPE but this also applies to changes of ownership of businesses involving public companies, or from one family or individual to another. And employees have no "voice" if a continuing owner chooses to significantly increase financial risk by taking on more debt or reducing dependence on equity capital. Private equity is no greater threat per se to the interests of employees than other forms of ownership. Aggressive use of debt or poor transparency is not exclusive to private equity. One should be careful about extrapolating individual examples into broader conclusions without acknowledging that a similar approach to cases taken from other forms of ownership could support similar conclusions.

  20.  I have already commented on the surprisingly poor returns produced by venture capital. By contrast funds specialising in non-venture private equity (management buy-outs and buy-ins) investing in medium-size businesses have produced good returns and can generally be regarded as being beneficial to the overall economy. Private equity funds operating in this area have tended to focus on acquiring private or family owned businesses or the divisions or subsidiaries of larger companies which have been neglected by the parent company, denied access to necessary capital and good management or which have a demotivated workforce. There are many examples of success in this area and relatively few examples of failure, although I sense that the risks of failure may be increasing as the result of aggressive financing strategies. I think the Committee would find it helpful to take oral evidence from general partners specialising in the small and mid cap markets. The mega fund general partners do not represent the totality of the private equity sector.

  21.  An entirely new feature of the private equity market in the last few years has been the emergence of very large private equity funds making offers or proposals to acquire large publicly quoted companies, lock, stock and barrel. This is a phenomenon which few would have anticipated 5 years ago. It represents a very different business model from the activities previously conducted in this country under the heading of venture capital and private equity. I would estimate that at least a quarter of all FTSE 100 companies (representing circa 90 per cent of all listed UK equity by valuation) have been mentioned as potential private equity targets in the columns of the Financial Times over the last six months. I believe the growth of this new business model over the last five years can be accounted for by:

    i.  The abundant availability of credit.

    ii.  The suspension of many traditional understandings about risk measurement and pricing.

    iii.  The willingness of public equity investors to accept cash offers at a material premium to the undisturbed traded price before an approach.

  22.  I have written elsewhere on the subject of public equity investment and the behaviour of investment institutions, including their tendency to hold widely diversified portfolios and their proclivity to grasp for relative performance by accepting takeover bids, regardless of the challenge of finding a better home for the proceeds. Many managers of listed equity portfolios adopt index tracking or close to index matching strategies—they have ceased to invest in individual companies, limiting themselves to capturing the "asset class return" of equities. If this is a problem the answer must lie with the clients of these institutional investors and the goals and performance review methods they employ.

  23.  Wider awareness of the activity of the very largest private equity funds has led to questions about whether such funds constitute a public interest concern. I would look at the issue from the other side: do the advantages claimed for private equity constitute weaknesses in the public equity model capable of being addressed by a less expensive response than companies being taken private?

  24.  Private equity appears to have two distinct advantages when bidding for public equity: firstly, its use of debt and secondly a set of less restrictive governance protocols. On the subject of debt, I find it perplexing that private equity appears to be comfortable with so much more debt than public equity investors and directors judge appropriate for the same company when under public ownership. The FTSE 100 index is currently leveraged with net debt of less than one year's EBITDA, whereas private equity can be comfortable with debt to EBITDA ratios of more than eight. Why can it be that one form of ownership should favour an entirely different level of financing risk and capital structure from another given that both forms of ownership work under the same tax regime? I think the answer may lie in the second explanation for private equity's competitive advantage: governance. The direct engagement between the private equity general partner and the investee company promotes greater confidence and comfort with higher debt levels. Moreover, I would contend that the weight of corporate governance process and focus has promoted an increased risk aversion among the non-executives on many public company boards. One hears of the agendas of some public company boards being swamped by governance matters to the exclusion of business development and value creation. The primary answer to this must lie with boards of directors and their chairs. They could be usefully encouraged in this respect if those who spoke on behalf of the institutional investors gave more encouragement by appearing to be less preoccupied with remuneration and producing and measuring compliance with governance codes and more interested in the promotion of value creation. A better balance is required in articulating the role of non-executive directors in both enabling value creation and overseeing governance process. The risks and rewards for non-executive directors are decidedly asymmetrical—rewards for success are no different to the rewards for mediocrity while the penalties for failure are severe in terms of reputation. Risk aversion is not surprising. I believe this explains why in several cases public company boards appear, with the benefit of hindsight, to have recommended takeover offers which subsequently proved to be well below the value unearthed by private equity purchasers. Pressure from institutions invested in public equity to capture bid premia and avoid the almost inevitable fall in share price of an offeree company when a cash bid fails gives non-executive directors little encouragement to be bold. Recommend the bid, bask in a moment of glory and move on to the next board room appears tempting to some.

  25.  The ultimate investors in private equity are the same ultimate investors in public equity—the pension funds of companies, not-for-profits, public authorities, insurers, endowments and private investors. These investors should ask why they invest in private equity with its association with aggressive capital structures, high incentives for management and a minimalist approach to governance (in the interface between the end investor and the investee corporation) while adopting an entirely different set of approaches when investing in public equity. Either the rewards and incentives and governance model in private equity represent good value for the owner/investor and are a justified cost, in which case why is this approach not replicated in public equity investment, or it is an unnecessary and avoidable cost for private equity. Determination of the most efficient form of financing (use of debt) should not be a function of the form of ownership and yet it appears to be.

  26.  In my experience private equity tends to employ high quality executives with considerable focus on producing good investment results for their investors. This is not surprising; rewards in the industry can be extraordinarily high, allowing general partners to recruit talented people and reward them handsomely for exceptional performance. That said one would not go as far as to say that the general skill and talent evident in private equity is decidedly superior to that found in other business segments or professions. The skills one finds in the general partner community tend to be focused on company valuation and financial engineering. General partners are not normally business managers and, with some notable exceptions, cannot be described as entrepreneurs in the way that term is now normally employed. The skills required to be successful in private equity can be found across a wide range of sectors. Private equity executives are, for the most part, highly skilled technicians, but more expert in identifying and releasing value than in creating it. I make this point in order to support my view that I would not be too greatly concerned or inhibited in addressing tax issues (see paragraph 38 below) by threats that individuals in private equity would go off-shore if the tax arrangements they currently enjoy were changed. The pool of available talent able to join the private equity industry is not small.

  27.  Can I see any likely end to the activity of large private equity funds contemplating bids for very large public companies? I have explained that I believe this phenomenon is largely due to credit availability and would expect it to diminish, possibly quite rapidly, if credit tightens or the appetite and pricing of risk reverts to norm.

  28.  For the time being, we appear to be living in a time of cognitive dissonance. The "masters of the universe" (I know of no "mistresses of the universe" among private equity general partners) appear to believe that there is no economic sector or type of business in which a company is not worth more under their ownership and direction than in the hands of current owners and management. The largest private equity firms are announcing major deals worldwide on a weekly basis. No industry or business appears to represent a challenge too far. Under their management they believe investee companies can thrive under levels of debt which represent multiples of those judged appropriate by previous owners and managers. If cash flow is insufficient to service debt there are a wide range of instruments which will overcome this technical problem (PIKs etc) and banks, keen to help private equity, appear happy to live with weaker covenants than might have applied under previous ownership. Companies are frequently being financed with debt levels above the market valuation of the company before the approach by private equity and equity originally provided in support of a transaction is at times reduced through an early dividend recapitalisation (which can have a powerful impact on the general partner's reported IRR, with benefits to future fund raising). The economic incentives at work are all pointing towards taking on more financial risk. The wisdom of decisions made at such a time will not be evident until economic conditions become more challenging.

  29.  Notwithstanding my words of caution in the previous paragraph, I do not believe that current market practices constitute unacceptable systemic risk. Total loans and debt outstanding still represent a relatively modest proportion of corporate debt and this debt is widely distributed. The FSA is quite sensibly taking a close interest in leveraged lending and has introduced a specialised supervision programme, including periodical surveys to better understand developments in leverage and complex financing. This study is likely to include scrutiny of "covenant-lite" loans. These loans may represent a higher level of risk to the lender but not to the borrower. Regulated lenders should be left to make their own decisions provided they fall within the prudential standards set by regulators. The FSA has the necessary powers should it wish to influence lending behaviour by regulated bodies. It has less influence over the activity of non-bank investors in debt instruments. Risk here is widely distributed but we are in new territory in speculating how instruments and investors will behave under stress. The FSA needs to maintain a keen interest. The FSA has also said that it is alert to risks of market abuse, especially with respect to public to private transactions, and to conflicts of interest. It intends to conduct thematic reviews which will focus on the management of conflicts within private equity firms. These steps appear timely and appropriate. I believe there are also some areas of potential conflict in public to private transactions involving directors of the quoted company which would benefit from the attention of the Takeover Panel. The challenge for the Panel is to ensure that all prospective bidders have access to the same information and that outsiders do not suffer from information or negotiating disadvantage.

  30.  The British Private Equity and Venture Capital Association has recently established a Working Party under the chairmanship of Sir David Walker to look into ways in which the levels of disclosure by companies backed by private equity can be improved. I am not persuaded that this is an area which requires legislative intervention. Put simply, private equity owned companies already have to comply with the same statutory reporting obligations that apply to all other forms of company, regardless of ownership. Public companies work with a more complex set of requirements around disclosure in order to address the fact that they have multiple owners and their securities are freely traded. These forces for disclosure do not apply to businesses owned by private equity. That said, as I argued in my Review, I believe it would be in the best interests of the private equity industry and its future if private equity partnerships made greater efforts to explain their activities and the performance of the companies they own to a wider audience. Put simply, private equity is more likely to prosper if the industry has a positive image which will encourage others to invest and deal with it and will not cause alarm to employees, trade unions, suppliers, customers, regulators or legislators.

  31.  The group established by Sir David Walker is heavily weighted towards people from the private equity industry. The group's report will therefore, importantly, depend on Sir David's reputation for independence. I am hopeful that he will produce a report which draws upon independently sourced facts rather than assertions to support its conclusions and recommendations. I would also encourage Sir David to persuade the BPEVCA to extend the terms of reference of his group to include a review of practices in reporting to limited partners in private equity funds. In theory this should not be required as the capital providers should be in a position to insist on necessary disclosure standards but my experience has tended to suggest that investors can be quite lethargic in this respect. I believe a more candid and complete explanation of the returns to limited partners and general partners and the construction and allocation of the general partner return might facilitate a more informed challenge to fund fees (and the level of charges to funds by general partners for other services provided to the partnership). I also think the Walker group could provide a valuable service in further raising standards of disclosure around performance of individual investments, the capital structuring of each investment (and the reason why a particular structure has been chosen) and the way in which this flows through to bottom line performance (attribution analysis). I believe disclosure of this information should be largely limited to investors in the fund and prospective new investors with the general partner. Sir David might also want to think about private equity investment from the perspective of limited partners and the governance of partnerships in considering whether they have access to sufficient information and have appropriate opportunity to express individual or collective voice. The limited partners, in practice, have little voice save in extreme situations.

  32.  The private equity industry has spoken eloquently about the benefits to UK pension funds, including those of trade unions, from investing in private equity but we have little evidence about the source of funding to UK private equity partnerships or the allocation of investments across partnerships. I suspect the majority of funding for the largest private equity funds comes from overseas investors and funds of funds rather than from UK pension funds, endowments and insurers. This is another area where Sir David Walker could shed some helpful light which would facilitate understanding of the economic significance of private equity.

  33.  HMT has said that it will watch the developments arising from Sir David Walker's group very closely. I hope that Sir David will lead the industry towards enhanced disclosure about fund and investee company performance, fund structures and charges and the allocation of performance awards. I would like to see the Select Committee encourage Sir David and his group to grasp this opportunity to widen the scope of their work and make a truly meaningful contribution to enhancing the understanding and status of private equity.

  34.  Although the market place for managing private equity funds is very competitive that competition does not tend to manifest itself in fee charges where there is a high degree of uniformity across the private equity industry. This is also the case for the management of public equity portfolios where there is little price competition (save by style eg index trackers). Private equity managers with a strong performance record and organisational stability currently have little difficulty in raising new funds and appear under no pressure to discount fees unless they secure some direct benefit—for example, existing clients making an early commitment to invest in a new fund. I see no reason for Government to become engaged in the free determination of fees between buyer and seller but I would suggest that it is for buyers to make the case if they believe they should be sharing in more of the economies of scale available to some general partners as they raise ever larger funds.

  35.  I noted in paragraph 11. above that private equity funds have finite lives. General partners are obliged to sell all investments and return proceeds or specie to their limited partners. This begs an interesting question and raises the possibility of a hybrid model. If private equity investment genuinely has superior features as a consequence of better capital management, more effective incentive and hands-on management, it appears odd that businesses which have benefitted from such ownership are then sold back into a supposedly weaker form of public equity ownership (either through a Listing or as a corporate transaction). There may well be a niche here for the emergence of a model involving private equity disciplines and long term ownership. This invites the question why limited partners insist on specifying limited durations for partnerships. It is quite possible that this insistence actually comes from the general partners who need a structure that requires disposals in order to trigger the calculation of performance payments. This might be one of the reasons why we have seen an increase in the number of secondary disposals by private equity in which a business is sold by one private equity partnership to another (even though in theory the first private equity owner should have already secured all the available opportunities for exceptional performance improvement). Such transactions may be what HMT had in mind when telling the Committee that "investors need to be vigilant about any potential for misalignment of incentives within the private equity model". This leaves open the question about how such vigilance can be exercised and the capacity of limited partners to challenge given their modest authorities within the partnership structure. I am hopeful that Sir David Walker, with the encouragement of HMT and the Committee, will give this matter the benefit of his considerable wisdom and experience.

  36.  I have already touched on one issue where taxation impacts on private equity; the use of debt and the ability to deduct interest payments from profits before taxation. Private equity enjoys no particular benefit in this respect save for its willingness to manage with less equity and more debt than other ownership models. HMT is currently reviewing the use of shareholder debt where it replaces the equity element in very high leverage deals. There is some evidence that some investments have involved equity masquerading as debt. It is natural for Government to have an interest from a tax perspective in such structures.

  37.  A number of countries have introduced some limitations on the extent to which interest may be offset against profits but I believe that none have done so with a particular focus on private equity. An economic case can be made for change in this area, particularly if linked to a reduction in profits tax rates, but that is an issue which goes well outside the current Inquiry.

  38.  The second area where the taxation issue has been raised in connection with private equity relates to the tax status of the general partner's performance payments secured through the carried interest. This area has been the subject of a number of negotiated agreements between the private equity industry and HMRC (the industry is not alone in having agreements relating to features specific to an industry). In 1987 the private equity industry established with the Inland Revenue the manner in which existing law should be applied to venture capital funds structured as limited partnerships and in 2003 new rules were discussed and clarified to indicate that, provided private equity funds operated within some very clear parameters, capital gains treatment would apply to profit shares earned by general partners. It is the consequences of these memoranda of understanding that have led to observations contrasting the tax rate of general partners and cleaning ladies. Greater public awareness of the operation of this tax arrangement seems to me to place the burden on the private equity industry to make the case for general partners continuing to benefit from what many regard to be a generous interpretation by HMRC. The issues involved are complex but, put in simple terms, it seems to me that the carried interest is a reward for employment and management performance rather than risk taking and should, accordingly, be treated as income in the same way that bonus payments to employees in most other industries are treated as income. General partners in private equity funds normally subscribe equity capital to the funds they manage (external investors basically insist on this as an inducement towards aligned interest). I see no reason why the profits arising from capital subscribed by general partners, which is clearly "at their risk", should not be treated as a capital gain but it does not follow that the same tax treatment is appropriate for the gains arising from the capital placed at risk by others (the limited partners). I understand that HMT is actively reviewing the taxation of a range of employee-related securities. [US legislators are raising similar points—Baucus and Grassley.] HMT will no doubt include in its review the tax treatment of general partner income from carried interest. It should also consider how this relates to the use of shareholder debt and the use of base cost shift and any allocation of base cost shift between those general partners who are domiciled in the UK for tax purposes and those who are not. In reaching a view on these matters, HMT should take into account the success the UK has achieved in becoming a leading centre for private equity and the benefits this brings to other sectors. It also needs to understand the practical issues involved to avoid unintended consequences. An early announcement of HMT's thinking would benefit all participants and may stem tax loss.

  39.  In conclusion, I argue that:

    —  Private equity poses no particular economic or systemic risk as a form of ownership. Private equity can have good and bad outcomes, just like other forms of ownership. The economy benefits from choice as a consequence of a diversity of ownership and financing models.

    —  Some private equity investors have enjoyed extraordinary returns. Many have not. Private equity has been behind many stories of corporate recovery and growth. But there have also been failures.

    —  Some private equity investors may be taking on too much debt risk but this is a matter for the judgement of investors and lenders. That said the economic incentives may well point borrowers and lenders towards taking on too much risk. The FSA is monitoring the situation.

    —  Public equity is as free to use debt as private equity. It has chosen to use a lot less. The divergence of practice between public and private equity is stark. Ownership form should not have as much affect in decisions about determining optimal capital structure.

    —  In some respects it could be argued that private equity benefits from a superior form of governance to public equity as a consequence of shorter chains of ownership and communication. Public equity may not be able to achieve equivalence in this respect but it should benefit from other advantages including, importantly, access to cheaper equity as a consequence of greater transparency and liquidity. Those who invest in public equity and who are responsible for setting and policing governance standards should reflect on whether public equity governance has gone too far in terms of its focus on process. And they should ask themselves serious questions before accepting cash bids, even if a share might trade below the offer level after a bid fails. Their interest should be in achieving superior long term performance rather than booking quick gains.

    —  Private equity (those who work in the industry and invest in its funds) should see that it is in the industry's interests to increase disclosure about the industry's activities and the performance of investee companies and funds. This would facilitate the industry making a more effective case about its economic and market contribution. The Walker review represents an excellent opportunity to recommend and embrace new disclosure standards.

    —  HMT is right to review the use of shareholder debt where it replaces equity and to examine the taxation of a range of issues associated with the employment-related income of general partners. HMT will no doubt continue to favour tax policies which promote good enterprise. In developing a policy response, HMT will need to weigh the interests of fairness with an evaluation of the risks to an active and growing industry of any outcome which would be regarded by general partners and investors as seriously worse than the current status quo. No doubt the work of the Treasury Select Committee will inform HMT's thinking on the economic importance of the industry and the threats apparently expressed by some of going offshore if effective tax rates are increased. In my view carried interest payments are income related to employment and should be taxed as such in this country at the appropriate marginal rate. It is for general partners to challenge this conclusion.

    —  Private equity owned companies apparently directly employ over 1.2 million people with a significant additional number dependent in some way on businesses owned under this model. It is not a bad way to own a business. Advocates of private equity deserve a fair hearing, but they must make their case with moderation and sensitivity to the views and concerns of others.

June 2007

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