Examination of Witnesses (Questions 49-59)|
12 JUNE 2007
Q49 Chairman: Welcome to the Committee.
Can you introduce yourselves, please, for the shorthand-writer?
Mr Hutton: My name is Will Hutton.
I am Chief Executive of The Work Foundation, and author, I guess.
Mr Barber: Brendan Barber, General
Secretary of the TUC.
Mr Overell: Stephen Overell, The
Ms Williamson: Janet Williamson
from the TUC.
Q50 Chairman: I will focus the questions
on yourselves, Will and Brendan. You have heard some of the evidence
already on it: this is a hullabaloo about nothing really, the
private equity industry is just a new concept in the capitalist
market, risk is well diversified and your concerns, Will Hutton,
amount to nothing, and, Brendan, you are here really just to defend
the workforce and are not facing up to the good things about private
equity. Answer: Will?
Mr Hutton: I think that both the
opportunities for private equity and the criticisms of private
equity derive from a weakness in Britain in the structure of ownership
in our plcs. Whether it be the opportunity to make a great deal
of money by doing what boards of plcs have not done, or easily
to gain ownership from institutional investors, in order to do
things to companies that would be less than desirable for their
medium and long-term interests, it springs from the same root,
which is the weakness of the way we own commercial business assets
in the public domain in Britain. There are obviously examples,
and the Committee will hear examples, of bad stories of private
equity, and they will hear good stories, for every Debenhams there
is a counterpoint of, say, I do not know, what has happened to
Threshers or Halfords, which were turned around by private equity,
so you have got point-counterpoint throughout. What I think is
taking place is the same kinds of things that we saw in the early
1970s, with a great rash of people. Committee members will remember
Jim Slater and the secondary banking crisis which followed on
from that. They will remember the build-up of conglomerates, like
Hanson Trust, which has ended in a whimper recently, as Hanson
sold out, as the company sold out, and I think this is part of
the same story. I think that, yes, private equity runs through
everything, from a committed venture capitalist who is genuinely
interested in business-building, through to people who are interested
only in getting in and out and maximising the returns to themselves,
and actually the people who bear the risk in those cases are the
Q51 Chairman: Brendan, you are a
sophisticated yet short-sighted shop steward: answer?
Mr Barber: Thank you very much
for that, I will reflect on that. Five years ago I think the global
value of private equity buy-out was around $100 billion; in five
years it has increased to $500 billion, it has increased five-fold
in that very, very short period of time. One in 12 of the private
sector workforce is now employed by companies that are owned by
private equity funds. It seems to me, the degree of scrutiny to
which the sector is being subjected is very timely, some might
say long overdue. We had a company law review which started in
1998, resulting in legislation which went through at the end of
last year. We spent eight years agonising over the role of plcs
and their accountability, and so on. I think we need to pay pretty
urgent attention to the increasingly significant role which private
equity is playing in our economy.
Chairman: Thank you.
Q52 John Thurso: Taxation: is the
tax structure inherently unfair; does private equity have an unfair
Mr Barber: I think there are two
tax issues. One is the tax treatment of debt and the second is
about the treatment of the reward structures in the private equity
sector. So far as the tax treatment of debt is concerned, clearly
the tax support for debt financing is available to plcs just as
much as it is available to private equity; but the private equity
model essentially is based on increasing the amount of leverage,
with all of the risks that go with that, and I think that is of
major concern. The vulnerability of companies at a time of economic
turbulence if they are loaded with debt is that much sharper,
with of course the risks to the employees very much in my mind
as a part of that. I think there are concerns about whether it
makes sense to incentivise debt financing in the way which effectively
the tax system does currently, rather than equity financing. Supporting
business start-ups through the tax system, clearly desirable,
supporting investment in organic growth, desirable, but seeing
the support of the tax system used in the context of simply financial
engineering, with these huge takeovers, I do not think is justified.
Mr Hutton: I think there is an
emerging consensus, in both Britain and America, that the taxation
of carried interest for full partners in private equityand
if it is 10% in Britain de facto and 15% in the Statesis
too low. That tax regime was designed for genuine entrepreneurs
and the gains that accrue to full partners in private equity houses
are because they are, in effect, employees of those firms. I am
pretty confident that, as a result of this inquiry and an emergent
cross-party consensus and an international consensus, the taxation
of carried interest will change. I think it is interesting what
impact that is having on the deal flow at the moment. The one
thing that the Committee might interest itself in is the extent
to which, because that tax change is imminent, and whether we
will see a lot of exits to capitalise on the current regime before
the tax change.
Q53 Mr Simon: If the tax, particularly
the carried interest, was removed or turned down, made less striking,
Brendan, how would you feel about private equity then, as an ownership
model, as a vehicle for leveraging in investment?
Mr Barber: I think we have a range
of concerns about the private equity model, the risk that comes
with the excessive debt which can be piled into the field, the
accountability and the transparency.
Q54 Mr Simon: Have you done a lot
of research into that risk? You used the phrase "the vulnerability
if they are loaded with debt is that much sharper." Have
you got a lot of evidence to support that, or have you just made
Mr Barber: I do not think we have
made it up.
Q55 Mr Simon: Have you got a lot
of evidence, in which case?
Mr Barber: In the event of interest
rates going up or the kind of economic turbulence that we have
seen in previous periods, businesses carrying large amounts of
debt are going to be that much more vulnerable.
Q56 Mr Simon: You have just stated
that again, but have you got any evidence for it?
Mr Barber: I think we see anyone
carrying large amounts of debt, even in our personal lives, you
Q57 Mr Simon: In other words, you
are extrapolating from your personal life that this is not a successful
ownership model in the economy?
Mr Barber: The FSA, only yesterday,
talked about excessive leverage and that being of major concern
in terms of financial stability, and the risks of significant
companies going under. I think they are right to be concerned
about that risk.
Q58 Mr Simon: But you have not got
Mr Barber: I have got the same
evidence to which I think the FSA are addressing themselves.
Q59 Mr Simon: But you have not actually
got any evidence?
Mr Barber: I am not quite sure
I follow your question. I am sure it is a clever one but I have
not quite got to the bottom of it.
Mr Simon: I thought it was a simple one.