PE Bosses Say Industry is “Force for Good”

The heads of leading private equity firms said their industry is a “force for good” today , though they admitted that they could do a better job with the way they treat employees.

Appearing before the Treasury Select Committee, the bosses were unanimous in their claims that private equity is beneficial to the UK economy. 

However they also voiced their support for the Treasury's inquiry into the industry's much criticised-tax regime, although rejected calls for profits they make from selling companies to be treated as income rather than capital gains.

Dominic Murphy, a partner in Kholberg Kravis Roberts – the firm buying Alliance Boots, said private equity had wide-ranging benefits for the UK economy as a whole. 

 “My experience of private equity is increased employment, increased investment, increased growth and superior returns to pensioners up and down the country,” he said.

Dominic Buffini, the managing partner of Permira, added that he believed the industry's poor image wasn't helped by the fact that people were unaware of the returns it brings to millions of pension funds.

“We have 30 million pensioners in our pension funds, millions of those are in the UK, and we produce world class returns for them in an era when pension fund deficits are a big issue and I think that's of benefit to the country,”

However Robert Easton, a managing director of the Carlyle Group conceded that there are problems with the way the industry treats employees in the companies it buys, admitting some firms did not do enough consultation with them.

“As an industry we have not done a good enough job for our employees,” he said,

“We (the Carlyle Group) do the best we can within our circle but I think as an industry there should be a voluntary code,” he said.

Earlier trade unions representatives told the committee that private equity companies pay little regard to the interests of workers.

“They (private equity firms) are not in for the long-haul, they are in for making money fast and they do not care who they hurt in the process,” said Paul Kenny, general secretary of the GMB Trade Union.

The unions also voiced severe criticism of the taper tax relief system enjoyed by private equity bosses.

“There's no coherent economic reason for that. it's quite wrong that the cleaners we represent in Canary Wharf and the City of London are paying tax like any other citizen but the people that they clean for are getting away paying minimal tax earning fabulous wealth,” said Jack Dromey, deputy general secretary of the Unite union.

Private equity investors enjoy a tax benefit since the majority of their earnings come from profits made from selling on companies which are eligible for taper relief. This reduces the tax on the profit from 40 pct to 10 pct provided the firm holds it stake in the company for at least two years before selling it on.

The four representatives from private equity firms told the Committee they supported the Treasury's review of the taper-relief system, although rejected calls that the earnings should be treated as income rather than capital gains.

“The industry has benefited from taper relief, the UK economy has benefited but I think it's right to look at it again,” said Buffini.

Murphy added that if the review determined that it was in the UK's best interests that the relief system was changed, then we would be happy to accept those reforms.

However, Philip Yea, chief executive of 3i said he was concerned that changes to the regime could damage the UK economy's competitiveness.

“The UK economy has come down the competitiveness table….I do believe changes to the tax regime could take us further down that league,” he said.

All four were, however unsurprisingly reluctant to discuss the personal wealth the relief system has bought them. They also drew gasps of surprise from the committee when none of them said they were able to say how much capital gains tax their firms as a whole paid to the Treasury.

However they did agree with a suggestion put to them that the return a firm can make on its original equity investment can be a multiple of around 2,500.

Turning to the accusation that firms “asset strip” – cut jobs and selling parts of the companies they buy to finance debt – KKR's Murphy said that it was a “ludicrous suggestion”.

“If you buy something you want it to grow, you want to make it rise in value,” he said.

Asked specifically about Alliance Boots, Murphy said KKR had no plans to shut any pharmacies down, and on the contrary was hoping to expand the company in the UK and in to Europe.

Finally the four also rejected suggestions that the high levels of leverage used by private equity firms to make acquisitions – usually a ratio of around 70 pct debt to 30 pct equity – has built in a systemic risk that the sector could implode at vast cost to the economy.

“I don't think it's in any of the private equity firms interest to overleverage,” said Murphy.

3i's Yea conceded however that he thought some funds were now taking excessive risks, but said there was no overall systemic risk to the economy as a whole.

rachel.armstrong@thomson.com