The four senior UK private equity figures quizzed by a becalmed Treasury Select Committee today put up a robust defence of the industry, arguing in favour of treating carried interest as capital gains for tax purposes, but acknowledging that a simplification of the current system could be beneficial.
Today’s Select Committee
Today’s Select Committee
The four presented a largely united front in defending their track record, their use of leverage and their current tax treatment, while expressing guarded optimism about the state of the market.
The only schism came over tax, with Moulton insisting that some executives were abusing the system by being domiciled overseas for tax purposes or hiding their profits in offshore vehicles – a charge that the other three declined to corroborate.
Moulton argued forcefully in favour of a simplification to the current tax regime, which he said was “arbitrary, quantitative and very difficult to manage”. All three of his counterparts agreed that simplicity was preferable, even if the basic rate became less favourable as a result. Indeed, Taylor suggested a rate of 15 to 20 percent “would not be a material disincentive” to UK private equity professionals.
However, all four insisted that it was right to treat carried interest as capital gains, since the contribution made by the general partner to a fund involved significant personal risk. Taylor said Duke Street’s partners had contributed €25 million to their new €1 billion fund, while Blitzer revealed that in the 22 years since the firm’s inception, Blackstone partners had contributed an average of 6 percent of their funds raised – totalling a massive $2.5 billion.
The Select Committee, which had previously shown its teeth by mauling the British Venture Capital Association at the first hearing and grilling four buyout chiefs a fortnight ago, was noticeably less hostile. Almost half of its 14 members were missing, including Labour MP Angela Eagle, who has publicly clashed with Duke Street over job losses in her Wallasey constituency. Chairman John McFall also struck a more conciliatory note, suggesting that the enquiry was a “fact-finding mission”, and stressing that the panel did not start with a preconceived opinion of the industry.
The panel generally did a solid job of putting recent controversial deals into perspective. When asked about Focus, the Duke Street-owned DIY chain that went into difficulties following a recapitalisation that allowed his firm to realise a profit, Taylor said the chain’s debt ratio when it became distressed had actually been low by market standards. He also pointed out that only one of his firm’s deals had ever lost money for investors in the firm’s 14 years of investing in the UK.
The laconic McKenzie also defended criticism over Debenhams, the retail chain that has seen its share price plummet since CVC, Merril Lynch and Texas Pacific Group re-floated it last year. McKenzie said his firm remained the company’s biggest shareholder and was committed to reviving its fortunes. However, he also pointed out that the other five of the six companies CVC had floated on the London Stock Exchange in the last six years had all out-performed the market, tripling in value. The firm’s reputation depended on this out-performance, he insisted.
McKenzie also batted away suggestions from Labour MP Sally Keeble that the recent merger between the AA and Saga was driven by a need to generate carry, pointing out that unlike Blackstone and other US firms, CVC did not take carry on a deal-by-deal basis, but over the full life-cycle of the fund instead. According to Taylor, this long-term time horizon strengthened the argument for treating carry as capital gains.
The panel was also quizzed on how they would advise public companies, since they had proved so successful in unlocking value from companies they had taken private. Taylor talked sensibly about aligning the interests between management and shareholders, efficient and prudent use of leverage and a long-term perspective, while Blitzer added that they should spend less time on regulation and encourage more risk-taking. However, McKenzie said his only comment would be: “Have you considered talking your company private?”
All four men expressed cautious optimism about the state of the UK market, with McKenzie saying it was currently “buoyant”. Moulton said the failure of some recent deals and financing difficulties – particularly in the US – indicated the industry was somewhere near the top of the market. However, they all agreed that the UK market looked fairly stable, and said there was unlikely to be any slow-down in dealflow.
The Select Committee, which has now finished its enquiries, is expected to publish its recommendations on the industry later this month. These may be informed in part by the recommendations of Sir David Walker, head of the BVCA-sponsored working party on transparency, who will publish his initial findings on July 17, while they are also expected to play a role in the subsequent consultation process.