Select Committee on Treasury Written Evidence


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 LookP2P (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





 
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