Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200-219)


20 JUNE 2007

  Q200  Mr Newmark: I do not think this does you credit either. I move on quickly to the workforce issue. Do you say that relations with workers are bad in all 1,500 private equity deals done per year, or is it more unusual? You give the examples of the AA and the Birdseye deal that was taken out. Are these exceptions to the rule, or do you say that pretty much all 1,500 deals done a year have examples of poor relations with the workforce?

  Mr Dromey: We are not saying that, but there are too many bad examples. For example, when Texas Pacific took over Gate Gourmet it treated the workers shamefully and sacked 600 women in a canteen and that led to a crippling dispute. There are too many examples of that, and time and again it comes back to private equity and leveraged buyouts. We have been very specific in our criticism. It is not a question of whether one is for or against private equity. We work with reputable players in the finance sector time and again to invest in and help rescue companies that employ our members. Mr Kenny has been very specific about the nature of the criticism: it is the rapid growth of leveraged buyouts and the price that workers pay which time and again is bad news. Workers are the only stakeholders who do not get a look in; the pension trustees and banks do so. There are premium rates of interest and covenants are sought. The only people whose voice is not heard are the workers in those circumstances, and that is wrong.

  Q201  Mr Mudie: I think the group makes the point it is ironic that the very same trustees who may be fighting to save the pensions when a private equity firm comes in are the people who may well be putting the investment into the private equity fund. I thought it was very humble of Mr Kenny to say that his organisation would not have very much influence. Mr Newmark said that he did not agree about the danger. I do not think there is anybody in the industry who does not think that benign economic circumstances will change and there will be casualties. Whether or not it is systemic, there will be casualties and if private pension funds are in there, as they are, and a big firm that has invested money gets into trouble there are catastrophic consequences for a lot of ordinary working people. Do you limit yourself to the time that the firm is taken over and you are defensively talking to trustees at that time, or do you have a co-ordinated policy at a political as well as a trade union level to try to influence trustees about the wisdom of their investment policies?

  Mr Talbot: I think that is a very fair point and it is something that we will have to pay more attention to in future than perhaps we have done in the past. There is a lot of concern about it. There could well be some sort of trouble. All sorts of economic factors could change. It is a bit like an earthquake: you do not know that it will definitely happen but it could and you do not know what the final consequences will be. I entirely take your point. Obviously, we do not have day-to-day control over the trustees. Nevertheless, in terms of advice, guidance and so on I for one shall certainly be looking at this in the future.

  Mr Kenny: We have had discussions with the TUC about creating a framework so we can get information out to people and understand not just the potential benefit but the potential risk. That has been missing in this debate. There has not been a debate like this. Maybe it took the union to raise the issue for the whole debate to take place.

  Q202  Mr Breed: Dr Dromey, in your submission you suggest that the general public has an interest in the private equity-owned company plans and activities. What do you think the public should be told, and why do you think it has a right to be told that information?

  Mr Dromey: The strength of public companies is that they are accountable. Obligations fall on them in terms of disclosure to their employees but also their shareholders.

  Q203  Mr Breed: That is because they are a public company.

  Mr Dromey: Yes.

  Q204  Mr Breed: But we are talking about a private equity-owned company. Why does the general public have an interest in a private equity-owned company?

  Mr Dromey: Because if one has very powerful companies operating in secret and they are totally unaccountable for the consequences of their actions for workers and the public that is wrong; it offends against what has been a generation of progress on openness and transparency of public companies. The model of public company operations is one that we should preserve, but private equity is escaping public scrutiny, which cannot be right.

  Q205  Mr Breed: Basically, you want the general public to have exactly the same information on a private equity-owned company as a public company?

  Mr Dromey: There can be no reason whatsoever why public companies and private equity should have different rules applied to them. The same rules, standards and law should apply to both.

  Q206  Mr Breed: Mr Kenny, in your submission you state that private equity companies have no duty of public accountability. Why should private equity firms have a higher disclosure than, say, very large family-owned companies, some of which are based in my constituency? Surely, it is wrong to discriminate against one particular form of ownership. Why should private equity firms have any higher disclosure than, say, some large family-owned businesses that have been going for a long period of time?

  Mr Kenny: You have just described why there is a difference. If you have a family-owned business, or one that has been running over a long period, it is clear that people are in it for the long haul. Someone described the period as three to seven years; most of the stuff I have seen is based on three to five years and people will get out quicker if they can. I think there is a very different approach both to how the business is managed and the employees are treated and the long-term investment issues related to that business. They are very different. Why should the public have an interest? If you take a company like Boots which is paying £150 million corporation tax and private equity takes it over and suddenly that £150 million no longer goes to the Exchequer, that has to be found somewhere else because they are paying out on the leverage. There is a liability on the taxpayer if the pension scheme goes; the taxpayer picks up the responsibility under the FAS. Finally, the taxpayer and public have the right to know that people are paying a fair share of tax, whether they are domiciled here or are offshore. There is an issue here about public disclosure so that people can see it is fair.

  Q207  Mr Breed: Your criterion for discrimination in terms of accountability, disclosure and everything else is to do with how long the company has been going?

  Mr Kenny: I am not an expert and I hope that you and the Treasury are. Ultimately, it seems that the rules were changed to encourage investment, which we want—we want growth and the creation of value—but in the end value is extracted. I am saying that the time one is involved before one can benefit must be important.

  Q208  Mr Breed: If one takes the example of Boots, that company continues. Boots has been going for over 100 years and it will carry on, we hope, for another 100-odd years. How do you discriminate in the case of that particular company which has been going for years, just like some big family-owned businesses? Why should there be any differential in disclosure and accountability?

  Mr Kenny: I do not think that Boots should ever have to carry the level of debt that it is currently carrying.

  Q209  Mr Breed: But that is up to the company.

  Mr Kenny: If, god forbid, the company got into difficulty the potential impact on the taxpayer to prop up the pension scheme is huge. I think that is a matter of public interest. The manner in which those people are treated is of interest to our union. We have members in Boots.

  Mr Dromey: What does private equity have to fear from having to be open?

  Q210  Mr Breed: We will ask them that in a moment.

  Mr Dromey: To be frank, from the point of view of the public until the GMB's campaign more was known about the Cosa Nostra than private equity.

  Q211  Mr Love: Mr Dromey, earlier you called for an independent analysis of the economic impact of private equity, presumably looking at productivity, although as a trade union representative your interest would be in job gains or job losses. Would that answer all of the concerns of the trade union about private equity?

  Mr Dromey: No; no study in itself is not enough. The time has come for action. We strongly believe that there is sufficient evidence to justify the taking of action now on tax transparency and the protection of workers. It would, however, be valuable for this debate to be properly informed, but what we do not want is a public policy response that is simply to conduct an investigation. What the workers we represent need is for government to be on their side and to act in the public interest to change the laws and rules as they apply to private equity.

  Q212  Mr Love: Ms Ludkin, earlier you said that when you tried to carry out a study you could not find any relevant information of help to you. Why do you think that is?

  Ms Ludkin: I think that private equity likes to operate under a veil of secrecy. I do not think that their results would stand up to independent scrutiny.

  Q213  Mr Love: The veil of secrecy has allowed all sorts of talk about asset-stripping, casino capitalism and all the words that have been bandied about in the debate over the past few weeks. All the public comment suggests that that is not in the interests of private equity, so why does it not come clean?

  Ms Ludkin: I do not think they anticipated this level of scrutiny. We are not responsible for all the dialogue and press accounts about them. I think it has taken them by surprise. There is a certain level of arrogance in the industry; it has fallen in love with ideas about itself and all of this is a shock to it. It is time for the industry to stand up. I am sure it is looking forward to speaking to you today, and I am certainly looking forward to hearing it.

  Q214  Mr Love: Mr Kenny, Sir David Walker is currently looking at a number of issues—we hope to pass our report to him—relating to transparency and disclosure. He is looking specifically at a code. What do you hope to get out of that? Would that begin to answer the concerns of the workforce?

  Mr Kenny: I like to give something more than two minutes before I make a judgment on it, but in truth not only has the horse bolted and the stable door has been shut; I think the whole stable block has been burnt to the ground. That initial report into some form of self-regulation as disclosure was a reaction to the situation at that time. The debate has moved on so far. There are issues about tax, which will not be covered by that, jobs and BVCA statistics. I think we copied one of the statistics that they gave us only to discover that it was not true. That statistic related to the number of jobs currently in that particular sector of the economy under their control. You have to believe some things they tell you, but the one thing they did tell us was not true.

  Q215  Mr Love: I do not want to leave the impression that maybe you are being too negative in relation to private equity. We understand that the primary concern of all the witnesses is their members. You have already said that not all private equity takeovers have been bad for trade union relations; and you have said that in some cases it leads to higher rather than lower levels of employment, although overall you believe that the balance is very negative. What changes in terms of disclosure and the way that private equity operates will allow you to believe that you are therefore able better to protect your members?

  Mr Talbot: One of the things we have said would be a welcome step is the introduction of a code of conduct agreed with the appropriate regulatory authorities and the trade union bodies and which can therefore set a standard right across the industry. If you asked me specifically what we are saying in relation to that it is that, first, there should be a commitment to corporate social responsibility, disclosure of information and consultation with the employees of the organisations concerned. There should be respect for terms and conditions and information and consultation arrangements, and so on. We think that that would be a welcome step. We accept that a code of conduct does not have legislative background. Nevertheless, if it was agreed in the way suggested it might go some way to resolve some of the present difficulties.

  Mr Dromey: A code of conduct would be welcome, but self-regulation by private equity would be worse than useless. There are now some voices heard in private equity about their concerns as to what is happening, and we welcome that. It is inconceivable that self-regulation will work, not least because unless there is an enforceable code of conduct for a new regulatory framework the rogues will undercut the reputable.

  Q216  Mr Love: When they come before us we will ask questions about some of the issues you raise, but there are many in private equity who say that you will kill the goose that lays the golden egg, as they put it. How do you respond to that?

  Mr Kenny: I do not believe that is true. The European Venture Capital Association has just said that the amount of new money that is available is not going to the traditional venture capital set-ups and management buyouts. Huge amounts of it is going into management buyins, so the very thing for which we are trying to create a tax regime to encourage value creation is now being starved of available money in the market and it is going into management buyins. That is a different agenda. I know that it is a bit like the emperor's new clothes and sometimes it is not a pretty sight, but in this case they are dealing with the business differently and they are not in for the long haul but to make money quickly, and they do not care who is hurt in the process.

  Q217  Jim Cousins: First, I am grateful to Mr Kenny and the GMB for bringing to the attention of the Committee the memorandum of understanding of 2003 between the Inland Revenue and the British Venture Capital Association which substantially modified the impact on private equity of the changes in the Finance Act 2003. As we can now see, not only did it do that but in two significant respects it varied long-standing guidelines about the way that interest should be treated. Did you make some further inquiries after you discovered this, because the memorandum of understanding can be set aside where the Inland Revenue judges that the purpose of the arrangements is tax avoidance? Do you have evidence that any such inquiries were made and any override of the memorandum of understanding ever took place?

  Ms Ludkin: Subsequent to discovering that—the memorandum was hidden in plain view on the HMRC site, having been directed to it by some accountants—we have written to the Revenue to make further inquiries about it but have not so far received a response. We would be happy to supply that to you once we have had the opportunity to look at it.

  Q218 Jim Cousins: A further point emerges from the memorandum of understanding which you have brought to the attention of the Committee. I think most people visualised that the people who benefited from capital gains tax taper relief were individuals, but what this memorandum of understanding reveals, as is quite obvious once it is pointed out, is that the relief can be extended to companies and special purpose vehicles that can be created for the specific purpose of having carried interest. These companies are not necessarily domiciled in the UK for tax purposes.

  Ms Ludkin: Absolutely not.

  Q219 Jim Cousins: Do you have any evidence of the extent of the use of companies employing individuals for the benefit of carried interest, or special purpose vehicles being formed for the purpose of holding carried interest, that are not domiciled in the UK for tax purposes?

  Mr Kenny: We do not because we discovered that only recently and sent it to you. We are still working on it but we do not have any evidence to present to the Committee at this stage. But if the inquiry is still going we will provide whatever we can come up with.

  Chairman: Thank you for your appearance. The memorandum of understanding is something that we shall look into further.

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