Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 260-279)

MR DAMON BUFFINI, MR DOMINIC MURPHY, MR PHILIP YEA AND MR ROBERT EASTON

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?

  Mr Yea: We put it in our submission. In the track record that we give there is a growth of 11% in 10 companies.

  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 overall figure.

  Mr Murphy: But I am talking about growth.

  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 right—the unions and employees—and 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 it.

  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 problems.

  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 policed.


 
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