Select Committee on Treasury Minutes of Evidence

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 experiences.

  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 equity—we can talk about statistics and examples later if you wish—is 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 for good.

  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 the country.

  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 several—I 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 with that?

  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 leverage—the use of debt—and 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 pensioners—we have a lot of pensioners who depend upon us—is 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 businesses.

  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 ones?

  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 investors.

  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.

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