Examination of Witnesses (Questions 240-259)|
20 JUNE 2007
Q240 Chairman: But look at the scale
of the fighting in the past week. Get real! What I am asking you
is: can you get your act together?
Mr Murphy: I think that through
the Walker review that is what we are endeavouring to do.
Q241 Mr Breed: Your erstwhile friends
at the BVCA have listed for the Committee very helpfully the reasons
why private equity is good for the country. Somewhat surprisingly,
they have omitted to list any of the disadvantages. Can you say
what you believe them to be, or are there none?
Mr Easton: My experience in private
equity in this country has been only positive. It has been positive
for the companies in which I have been involved. My most recent
investment in the UK put £250 million into a brand new bio-ethanol
plant in Teesside which has created 800 jobs during construction,
with double that number of jobs nationwide once it is up and running.
I do not see anything negative in that whatsoever.
Q242 Mr Breed: You are down for nought?
Mr Easton: I have had no negative
Mr Yea: There are two parts to
the question: first, the benefits to the country of the industry
in Europe being located here. Our capital is country blind; we
invest across the world. Wherever those investments are made there
are still people here who are involved in it. I believe that is
beneficial to London and very positive. Less than half our investment
is in the UK. I can tell you that the investments we do make are
very positive. I cannot think of a disadvantage in having a beneficial
productive industry that helps create change and enterprise.
Mr Murphy: I completely endorse
those comments. Private equity is a force for good. Gordon Brown
said earlier this year there was evidence that private equity
had created more jobs at a faster rate than some other institutional
investors in the economy. Ed Balls has communicated similar messages.
My experience of private equitywe can talk about statistics
and examples later if you wishis that there is increased
employment, investment and growth and superior returns to pensioners
up and down the country.
Q243 Mr Breed: So, it is win, win,
win and no loss to the country?
Mr Murphy: I believe it is a force
Q244 Mr Breed: Mr Buffini, strike
an independent note here.
Mr Buffini: We have 30 million
pensioners in our pension funds and millions of them are in the
UK. For instance, we have at least one million local government
employees, past and present, who invest in our funds, and we have
produced world-class returns for them in an era when pension fund
deficits are a big issue. I believe that is a big positive for
Q245 Mr Breed: On that basis, therefore,
do you believe that because there is a certain amount of concern
and scepticism, even criticism, it would be helpful to have a
truly independent analysis of the economic benefits to the country
of private equity from increased efficiency, the more productive
use of money and job creation? Would it help us and perhaps the
industry if such an independent economic assessment was undertaken?
Mr Buffini: There have been severalI
hate to say "hundreds"independent studies done
by well established institutions. I would be very happy to provide
the Committee with the details. They show the benefit of private
equity, management buyins, buyouts and venture capital. We are
quite happy to produce those for the Committee.
Q246 Mr Breed: Does anyone disagree
Mr Easton: I do not disagree with
that. I just say that the lady from the GMB needs to click on
a few more websites. There is plenty of data out there. If you
talk to any one of the top consulting or accounting firms you
will see data they have sourced from the industry which is not
freely available but certainly available; it is there and you
can have it.
Mr Breed: If any of you have access to
that and you let the Committee have it we will be extremely helpful.
Q247 Ms Keeble: Mr Easton, you talked
about the high rates of return. Do not high rates of return assume
a particular type of financial structure or restructuring and
an early exit?
Mr Easton: That is why I would
encourage you to get hold of these studies on our industry. They
break down the element of return which is delivered from leveragethe
use of debtand the element delivered from other sources.
I am a firm believer that we go in and transform companies and
make a big difference to them.
Q248 Ms Keeble: But you exit early,
do you not, and the returns depend on that?
Mr Easton: No. We try to build
value over a five-year period. From my experience of public companies
and private equity, we try to build value over that period, which
is a lot more long term in our thinking.
Q249 Ms Keeble: If we take Boots
which has been in existence for a very long time, for a private
equity firm to take it over to restructure it and pull out after
five years looks like the short term to most people.
Mr Easton: I am sure that Mr Murphy
will want to comment on Boots, but the reality is that studies
show that a minor fraction of the returns that we generate for
pensionerswe have a lot of pensioners who depend upon usis
from the use of leverage.
Q250 Ms Keeble: What happens with
something like Focus? As I understand it, it was taken over and
restructured and I think the equity is now valued at zero, according
to reports on the Internet.
Mr Easton: I am not familiar with
the Focus transaction, so I cannot comment on it.
Mr Murphy: To pick up Alliance
Boots, KKR is a patient, long-term involved investor. We have
a 31-year track record and we have done over 150 transactions.
The average lifespan over the 31 years for each deal is seven
years. The average lifespan of an institutional investor is probably
less than 12 months. Analysts in the public markets today are
very much focused on quarter-by-quarter results; KKR is interested
in long-term performance and building long-term sustainable growing
Q251 Ms Keeble: How long will you
stay with Boots?
Mr Murphy: We anticipate owning
Boots for at least five years. We cannot promise that; we cannot
predict the future. We feel that we have a very strong growth
vision for Alliance Boots and that fully to exploit it we will
own the business for at least five years.
Q252 Ms Keeble: You will pull out
of the agreement with the pension funds after only half its life,
because the commitment is for 10 years, is it not?
Mr Murphy: The relationship with
the pension fund will be protected for ever or as long as Boots
survives. The pension fund is there to be protected. We want employees
and pensioners to have all of their obligations fully satisfied,
so I do not think that the relationship between our ownership
period and the 10-year payment plan that you read in the newspapers
yesterday has any relevance.
Mr Yea: Our firm has produced
over £2 billion of value for UK pension funds over the past
three years alone, and less than one third of our business is
in leveraged buyouts. In the data that we have given the Committee
we have shown there is a very similar level of return between
our LBO business on an accounting basis and our growth capital
business. Therefore, the suggestion that it is all about leverage
is one that worries me.
Q253 Ms Keeble: You said that two-thirds
of your deals were leveraged buyouts.
Mr Yea: One third of our present
business is in leveraged buyouts; two thirds deal with other forms
of capital, such as minorities, family companies and others, and
we are getting good returns.
Q254 Ms Keeble: The tax structure
which is at the heart of the dispute was really set up to encourage
investment in start-ups, but in general what percentage of your
investment goes into start-ups as opposed to leveraged buyouts?
You referred to one third and two thirds. What about the others?
Mr Easton: In the United Kingdom
at the moment we have four buyout companies in our portfolio and
six venture projects.
Q255 Ms Keeble: What is the value?
Mr Easton: I suspect that it would
be 15% venture in terms of equity deployed versus 85% buyout.
Q256 Ms Keeble: And for the other
Mr Murphy: Our exclusive focus
is on large management buyouts or large leveraged buyouts.
Mr Buffini: And our exclusive
focus is on buyouts.
Ms Keeble: Referring to paragraph 7.11
of the agreement, which I am sure you are familiar with, since
you are open about information it would be helpful to know the
fund managers' market rate salaries as opposed to how much of
their income is derived from carried interest.
Q257 Chairman: You said that you
were there longer than institutional investors, but the question
for us is: how long does the management of a public company stay
in place compared with institutional investors? If you take BP,
Lord Brown has been there for years and years. I do not think
it is quite right to say that you are there for longer. The management
of public companies is there for quite a long time compared with
investors. Is that not correct?
Mr Yea: I am told that the average
life of a CEO of a FTSE these days is relatively short. I do not
know the precise statistic, but it is four or five years.
Chairman: That is something we shall
find out. I am just taking at face value your argument about institutional
Q258 Mr Love: There seems to be some
disparity between the view you have expressed and the way you
treat your employees as private equity investors based on the
view given to us earlier by the trade unions. Why is that?
Mr Murphy: I certainly think the
caricature is inaccurate from what we heard earlier this afternoon.
The best way to get the answer is to speak to the chief executives
of the companies that private equity has purchased. To hear from
the CEOs how they motivate and incentivise their workforces would
be a very worthwhile exercise. I can talk only about my own experience.
I have done a lot of leveraged buyouts over the past 10 to 12
years. We have a very positive experience in terms of employment
growth and relationship with the workforces, so the picture that
was painted was not one I recognised.
Q259 Mr Love: Mr Easton, was what
you talked about earlier in terms of employees an aspiration;
if so, when will it be a reality? I am referring to the very positive
picture that you have painted when we know there are significant
difficulties in some investee companies.
Mr Easton: We can trade isolated
examples of job losses and job gains for a long time. I think
the right thing to do is talk about the fact that in total the
industry has grown employment, sales and exports. As for Carlyle's
portfolio in the United Kingdom, we have done all three of those.
We have grown employment by more than 10 per cent. I will give
you just one example that demonstrates the productivity improvements.
We have managed to double sales in a company in Sheffield in four
years and we still have the same number of people in that company.
By doing so we have created a low-cost world leader in that industry
by making it productive. We have the same number of people with
double the sales.