Select Committee on Treasury Minutes of Evidence

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 Work Foundation.

  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 workforce.

  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 advantage?

  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 equity—and if it is 10% in Britain de facto and 15% in the States—is 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 it up?

  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 start—

  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 any evidence?

  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.

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