Examination of Witnesses (Questions 260-279)|
20 JUNE 2007
Q260 Mr Love: Did I hear you say
that overall you had achieved a 10 per cent increase in employment?
Mr Easton: Looking at our headquarters'
portfolio in the UK, employment has grown by more than 10 per
cent under our ownership.
Q261 Mr Love: Perhaps I may turn
to the other witnesses. What is your employment growth or reduction,
Mr Yea: We put it in our submission.
In the track record that we give there is a growth of 11% in 10
Q262 Mr Love: I do not want 10 companies;
I want the overall figure. Has there been job growth or decline?
Mr Yea: The data on all companies
including those still held with us shows a 12% growth since 2001.
Mr Murphy: From our perspective,
we have not bought too many companies in the UK. In the UK we
bought Willis in the late 1990s. When we bought it employment
stood at 9,500; today it is 14,500. Laporte which was purchased
back in 2000 has grown jobs from 2,500 to 9,500, albeit some of
that growth is through acquisitions. In terms of all my other
buyouts, whether they are management buyouts or buyins in which
I have been involved, they have grown jobs significantly. National
Car Parks grew jobs by 26% per annum; Fitness First has grown
by 12% per annum; Peacock Stores shows a growth of 9.4% per annum.
Q263 Mr Love: All I wanted was an
Mr Murphy: But I am talking about
Q264 Mr Love: Mr Buffini, can you
give an overall figure, because we have limited time?
Mr Buffini: We had PWC do a study
of our portfolio at the end of 2006. We had nine companies in
our portfolio; six increased jobs and three did not. We created
2,000 new jobs last year alone in the UK. That is a five per cent
increase year on year. Salaries went up by four per cent. They
also confirmed that for the following companies we had backed
the results were: New Look with 3,000 new jobs, Travelodge with
2,000 new jobs and Gala Coral with 1,500 new jobs.
Q265 Mr Love: Mr Easton, we are told
by the BVCA that TUPE applies. We have been told by the trade
unions today definitively that it does not apply. What happens
in your companies?
Mr Easton: Having read the transcript
of the evidence the other day, I think there is a huge misunderstanding
as to what TUPE is. In an asset sale, if we buy assets out of
a company TUPE applies; if we buy shares in a company TUPE does
not. That has always been the case. I have been doing this for
20 years in various forms, so there is no change in the position.
Obviously, there is a sense that a change is needed. When TUPE
applies we abide by the laws and regulations and we inform and
consult where appropriate.
Q266 Mr Love: TUPE does not apply
to the vast majority of your investments?
Mr Murphy: But it is not specific
to leveraged buyouts; it relates to all acquisitions.
Q267 Mr Love: I understand that.
Mr Buffini: When you buy a business
if TUPE does not apply you are legally obliged to honour the terms
and conditions of employees of the company that you buy; they
follow the company. That is the law.
Q268 Chairman: So, when you buy businesses
with shares TUPE does not apply?
Mr Buffini: Correct.
Chairman: It is important to make the
point that if you just buy the assets TUPE does not apply.
Q269 Mr Love: I turn to the working
group chaired by Sir David Walker. What do you hope to get out
of that working group?
Mr Buffini: I welcome the Walker
report. It is timely that we get some of these positive messages
out about the industry. I do not think we have anything to hide.
I give the example of the AA. When it was owned by Centrica there
was a page in the annual report of that company. Under our ownership
there is now a 50-page annual report which is available to everybody.
I think that David Walker intends to talk to all the different
stakeholders, which is absolutely rightthe unions and employeesand
he will come back and say maybe there should be more information
on companies in our portfolio and more timeliness in the provision
of information. I welcome the outcome of that and I do not prejudge
Q270 Mr Love: Mr Easton, you heard
earlier what the trade unions said in relation to Sir David Walker
and the need for greater transparency, consultation and disclosure.
Can your organisation go along with that agenda?
Mr Easton: As I said earlier,
there are three key stakeholders in the business: the employees,
the customers and shareholders. I will tell you that as an industry
we have not done a good enough job with our employees. For Carlyle,
when I buy a company I go out and meet every single employee.
I have stood in front of workforces from Sheffield to South Korea.
I give them the opportunity to ask me whatever they want to ask.
I never get beyond the first slide before I am interrupted. We
do the best we can within Carlyle. I think that as an industry
David Walker will step back and issue a voluntary code, which
is a good thing to do.
Q271 Chairman: You say that as an
industry you have not done enough for your employees. Is that
not why you have shot yourself in the foot to some extent? There
is more to do. Maybe that is one positive admission you can make
to the Committee today.
Mr Easton: Earlier you used the
expression "get your act together".
Q272 Chairman: You said specifically
that as an industry you had not done enough. Therefore, as an
industry you have to get your act together.
Mr Easton: And that is what the
David Walker report is about.
Chairman: It is a pity that we had to
wait for David Walker.
Q273 Mr Todd: The FSA has conducted
a review of potential risks in private equity. Do you feel that
the items it has identified as risks are fair ones? The ones they
have given highest priority are: market abuse, conflicts of interest,
excessive leverage and unclear ownership of economic risk.
Mr Yea: We contributed to the
FSA study and we welcomed it. Obviously, it has statutory objectives
to which it has to pay particular attention. I think that the
right risks are identified. From our perspective excessive leverage
and unclear ownership of economic risks are the ones that we regard
as most important but the FSA ranks them as "medium high".
Market abuse and conflicts of interest are wider than private
equity, and obviously with public to private there is greater
risk. I do not think it is saying that there is greater abuse;
there is just greater risk to which it needs to pay attention.
Q274 Mr Todd: I think it particularly
identified smaller private equity companies as ones that would
be more vulnerable in cases of market abuse, but, to focus on
an inward investment into a company in which one would be co-operating
with some senior managers within the business, one would have
thought that the potential for market abuse was very clear indeed.
What steps do you take to control that risk?
Mr Yea: In our firm we have a
conflicts committee that is set up and make sure that internal
conflicts within the firm are managed. We also have a clear set
of standards in the firm as to how those issues are dealt with.
Indeed, we have been able to share with the FSA the procedures
that we go through in dealing with this, because it is very important
that attendance is given to these matters.
Q275 Mr Todd: I said earlier that
the big boys seemed to worry the FSA a little bit less than some
of the smaller players in this field. I have had dealings with
a smaller player who is named in the GMB memorandum where there
appeared to be conflicts of interests that could be levelled at
the acquiring business. Those related mainly to property transactions
and shifts in the property portfolio for the benefit of some of
the players in it. Are these rules self-made by you? Obviously,
you interact with the FSA but one wonders whether the regulatory
environment is tight enough or really relies on self-regulation
by you guys. Is that the perception one has?
Mr Yea: As I understand it, the
FSA is doing a special study of how these issues are managed within
private equity companies with exactly that objective, that is,
to make sure that across the private equity and hedge fund industry
there is a clear standard.
Q276 Mr Todd: I focused purely on
you, Mr Yea. The other witnesses have remained silent on this
matter. Maybe they agree entirely with what you have been saying
and have robust procedures in place to deal with exactly these
Mr Murphy: From KKR's perspective,
over its 31 years it has built a reputation for a high degree
of integrity. We trade on our reputation; it is important to us.
At a more granular level, it is not possible for anybody in the
firm to buy individual shares in any company. There is no black
list; it is just forbidden to buy individual shares. For us conflicts
are very important matters.
Q277 Mr Todd: How do you deal with
the initial contacts with senior management within a business
which can easily be very price-sensitive? The individual may pass
on to you information about the operation of that business which
has a significant effect on its future valuation from which he
and you may gain. How do you control that process?
Mr Murphy: Confidentiality is
key and leaks in our industry in a public to private context are
extremely damaging and can rule out a transaction at a very early
stage. It is critical that whoever we engage with confidentiality
is preserved. Without it we do not have a business.
Q278 Mr Todd: But in the Boots acquisition
process you were working closely with a board member?
Mr Murphy: Yes.
Q279 Mr Todd: He had a duty to his
existing shareholders, presumably. How do you square that apparent
difficulty of relationships in which Chinese walls are erected
half-way down, as far as one can tell?
Mr Murphy: In that specific example
in every meeting we had with the individual in question lawyers
were present to make sure that no confidential information was
passed from that individual to KKR. All of those sessions were