Memorandum from Permira Advisers LLP
EXECUTIVE SUMMARY
— Permira Advisers LLP welcomes the
opportunity to contribute for a second time to the Treasury Committee
inquiry into private equity funds.
— Permira recognises the need for greater
levels of disclosure and transparency in the private equity industry.
Permira believes strongly that the Walker recommendations are
an important first step and should be the catalyst for a meaningful
change in the behaviour of the industry.
— Permira believes any effort to explain
better the workings of private equity and its strong contribution
to competitiveness, productivity and the long-term value of its
investee companies, is positive.
— Permira believes it is for policy
makers to determine what the appropriate level of taxation should
be for the UK economy. Our view is that any tax system should
operate consistently, and that private equity-backed companies
should continue to be taxed on the same basis as other companies.
— Public to private deals ("P2P")
represent a small proportion of Permira's total private equity
activity. Permira originates transactions from a wide variety
of sources. Given the varied sources from which Permira originates
deals, we believe that directly contrasting public and private-equity
owned companies is misleading, and represents a false dichotomy
when examining the merits of private equity transactions.
INTRODUCTION
1. Permira Advisers LLP welcomes the opportunity
to contribute for a second time to the Treasury Committee inquiry
into private equity funds.
2. Permira is an international private equity
firm. It has a staff of around 200 with operations in Frankfurt,
Guernsey, London, Luxembourg, Madrid, Milan, New York, Paris,
Stockholm and Tokyo.
3. The Permira Funds' focus is on investing
in large companies that are not fulfilling their potential and
would benefit from a period of private equity ownership. The value
created in these businesses by the changes effected during this
stage in their life—helping them to become stronger, more
competitive and sustainable—in turn generates the return
for the funds' investors.
4. Permira has raised and advised funds
with a combined total of more than €21 billion over the last
20 years. The most recent fund received commitments from more
than 70 public and corporate pension funds, more than 40 charities
and endowments, more than 20 life insurance companies and eight
governmental development agencies. The fund has more than 30 million
underlying pension fund beneficiaries, including approximately
one million current and former UK local authority employees. By
geography, some 55% of the capital committed to the most recent
fund came from European institutions, 35% from North American,
8% from the Far East and 2% from the Middle East.
5. Since 1985, the Permira Funds have completed
more than 180 private equity transactions. The Permira Funds are
currently invested in around 30 portfolio companies based in Europe
and the US and with operations around the world. Examples include
New Look, Gala Coral, Birds Eye, AA Saga (Acromas Holdings Limited),
ALL3MEDIA and Principal Hotels in the UK; SBS Broadcasting, Dinosol
and Borsodchem in Continental Europe; and Arysta Life Sciences
and Galaxy Entertainment in Asia.
TRANSPARENCY
6. Permira recognises the need for greater
levels of disclosure and transparency in the private equity industry.
Our view is that a long history of high levels of disclosure and
communication with limited partners has not been matched by openness
and transparency with other stakeholders including portfolio company
employees, the media, Government and Parliament, and trade unions.
7. In February 2007, Charles Sherwood, Permira
partner, said:
"What we have to do now, and I've been saying
it for quite a long time, the [private equity] industry should
be more open about what it does and what [portfolio] companies
do. And the companies should communicate more about what they
are doing and how they are creating stronger businesses which
benefit everybody." ("Permira accepts need to be more
open", Financial Times, 22 February 2007)
8. Since the second half of 2006 Permira
has taken a series of measures designed to improve levels of openness
and transparency:
— Permira has established an in-house
communications function, with a remit to ensure greater levels
of openness and transparency.
— Permira now has a regular informal
dialogue with trade union representatives.
— In Spring 2008 Permira will publish
an annual review in accordance with the recommendations made by
Sir David Walker. Those UK portfolio companies covered by Sir
David's recommendations will also be producing annual reviews.
— Gala Coral Group, a Permira portfolio
company, published its annual report on 14 December 2007. Gala
Coral was the first major private equity-backed company to produce
a "Walker Compliant" annual report following the publication
of the finalised Walker Guidelines for Disclosure and Transparency
in November 2007.
It is Permira's view that the recommendations
set out by Sir David Walker in "Guidelines for Disclosure
and Transparency in Private Equity" (November 2007) are an
important contribution to the industry's move towards greater
transparency and disclosure. Permira has clearly signalled its
intention to comply with the recommendations and is advanced in
its work to that effect.
9. Permira believes strongly that the Walker
recommendations are an important first step and should be the
catalyst for a meaningful change in the behaviour of the industry.
Reporting, after all, is just a proxy for real engagement. As
such, Permira intends to continue widening and deepening its engagement
with interested parties, from the media to trade unions, and build
on the work it has been undertaking throughout the year to that
effect.
10. Permira has strong and well-established
mechanisms to communicate with its investors. Openness and transparency
with investors underpins the successful operation of any private
equity fund.
11. In Permira's fund legals there are specific
and detailed requirements setting out communication with investors.
A number of mechanisms exist to ensure regular communication
with investors:
— Regular updates on the activities
and performance of both the investee companies and of the fund
itself.
— An annual document detailing the
performance of every Permira portfolio company.
— Investors attend an annual meeting
during which the performance of the fund is presented and discussed.
— Investors receive annual audited
accounts of the funds.
In addition, each fund has an advisory board
composed of representatives of its largest investors, which provides
oversight on key operational and strategic decisions, and which
oversees the resolution of certain conflicts of interest.
12. Permira's most recent fundraising lasted
approximately six months. During this time investors were able
to meet all of Permira's senior investment professionals, were
able to submit detailed questionnaires about all aspects of the
firm, conduct detailed due diligence on the firm's track record,
as well as being able to call on advice from highly sophisticated
investment consultants. Our investors' satisfaction with the information
they receive is reflected in the high rate of reinvestment in
our funds; approximately 90% of the investors by weight of capital
in our first European fund, raised in 1997, reinvested in our
most recent fund.
13. In the case of the other financiers
of private equity-backed companies, such as the debt providers,
we believe that the disclosure is adequate and is dealt with in
the very detailed information requirements set out in the loan
documentation.
14. Permira believes any effort to explain
better the workings of private equity and its strong contribution
to competitiveness, productivity and the long-term value of its
investee companies, is positive. As such, Permira welcomed Walker's
recommendations for much more extensive collection and analysis
of data relating to private equity activity. Clearly the credibility
of this exercise will only be enhanced by the participation of
independent parties.
THE TAX
REGIME FOR
PRIVATE EQUITY
15. Many private equity funds are established
as limited partnerships. From a taxation perspective, these limited
partnerships are fiscally transparent, which has the effect that
the investors in the funds are taxed on their investment in the
fund as if they had invested directly into each investee company
of the fund.
16. Since Permira submitted its first memorandum
to the Treasury Committee's inquiry into private equity, the UK
Government has announced its intention in the Pre-Budget Report
to make a series of changes to the UK tax regime. One of the effects
of the these changes has been to adjust the tax regime under which
private equity firms operate in the UK.
17. Permira believes it is for policy makers
to determine what the appropriate level of taxation should be
for the UK economy. Our view is that any tax system should operate
consistently, and that private equity-backed companies should
continue to be, taxed on the same basis as other companies.
18. Permira is on record in stating that
changes in taxation will not alter the firms's commitment to the
UK. The success or failure of private equity firms is not determined
by the level of taxation, but by the firms' ability to improve
the performance of the businesses it invests in.
19. Public to private deals ("P2P"),
represent a small proportion of Permira's total private equity
activity. Permira's last P2P deal in the UK was in April 2004,
and the Permira Funds have only completed 3 P2Ps in the UK since
2000. Permira originates transactions from a wide variety of sources.
ORIGINATION OF
PERMIRA UK PORTFOLIO
(AS OF
17 DECEMBER 2007)
Company
| Source |
AA Saga | AA acquired from Centrica in 2004, merged with Saga Group in 2007.
|
ALL3MEDIA | Acquired from another financial owner in a "secondary buy out" in 2006.
|
iglo Birds Eye | Acquired from Unilever in 2006.
|
Gala Coral Group | Already private equity-backed when the Permira Funds invested in the business in September 2005 (Gala Coral has a long history of private equity ownership).
|
Principal Hayley Group | Permira backed a management buyout of Principal in 2006.
|
| |
| New Look | P2P (2004). |
| |
Given the varied sources from which Permira originates deals,
we believe that directly contrasting public and private-equity
owned companies is misleading, and represents a false dichotomy
when examining the merits of private equity transactions.
December 2007
| 
