PE Week Wire: Mon., June 18, 2007

***PE Week Wire exclusive in today’s top three

The US Congress isn’t the only lawmaker that’s serious about changing tax treatment of carried interest. This debate is raging in the UK too but in this country there is a strong undercurrent of classism surrounding the talks. As a bit of background I should mention that this is Tony Blair’s last full week as UK Prime Minister and the heir apparent, Gordon Brown, is considered to be far more left leaning, classic Labour, you know “workers unite”, as are his ministers know as “Brownites” compared with Tony’s “Blairites and Blair Babes” as they have been lovingly coined by the UK press.

The changes in the political environment are palpable. When the TUC, one of the UK’s most powerful labour unions and a major Labour party supporter kicks up a fuss about how much money private equity managers are making through carried interest and avoiding the income taxes that workers are paying – the Brownites are listening. The TUC and now Labour Members of Parliment think that the private equity industry is exploiting a loophole in the law which allows carried interest to be taxed as capital gains at 10% through taper relief rather than income at 40%.

And heads have begun to roll over the issue. Last week the CEO of the British Venture Capital Association, Peter Linthwaite was forced to resign ‘effective immediately’ after an unconvincing turn in front of the Treasury Select Committee where he, BVCA Chairman Wol Kolade, and Vice Chairman Jeremy Hand were angrily questioned by Labour MPs. The private equity bourgeoisie – if you will – are under attack and it looks like a loosing battle.

Changing this tax law is a good political move for Labour especially after Nicholas Ferguson, the founder of SVG Capital, a senior member of the PE community spoke out and said PE managers paid less tax than their office cleaners. But what will tax changes do to the UK economy? Will higher taxes equal zero taxes as PE managers have the means to simply move to more tax friendly climes such as Jersey, Guernsey, Isle of Man, Gibraltar (all still part of the UK), Andorra, Austria, Campione D’Italia, Canary Islands, Cyprus, Ireland, Madeira, Monaco, Spain or Yugoslavia.

Taxes on carried interest isn’t the only political hot potato that the private equity industry is juggling, there is also a pension top-up debate raging. Several large private equity backed LBOs in the UK have been abandoned because of pension trustees demanding billions of pounds in top-ups for healthy and not-so-healthy pension funds provided by companies such as WH Smiths, J. Sainsbury and Boots. And the Pensions Regulator, an arm of the UK government, has recently given these trustees even more power creating a Poisonous Pension Pill. The debate centers around full salary pension schemes and ensuring that retirees of the generation that were entitled to these schemes continue to receive their benefits. As it is the view that debt weakens these companies and therefore weakens the covenant with pensioners, so a top-up is requ! ired to strengthen the pension separately from the company. But the top-ups run into the billions and can stop deals going through.

So there is not just a classism story here but also a cultural one. US investment into European private equity rose by 28% last year, according to research from PE Week Wire’s parent company Thomson Financial and the EVCA. With these investments and the increase in European LBOs by US firms, American companies are bringing their common business practices across the pond but these practices are fundamentally at odds with the working culture of the UK and Europe. American executives that are used to a legal system that protects the rights of the employer are getting a swift, sharp shock from the blended capitalistic socialism of the UK and most of Europe which still protects the rights of people rather th! an companies.

On a personal note, as an American who has been living in Britain for several years, my standard of living was definitely higher in the US. I had a car, larger house, larger refrigerator and taps that could mix hot and cold water together. But my quality of life in the UK with free healthcare, public transport, low cost airline travel, plenty of vacation time and a relaxed attitude to the ‘demon drink’ is a utopia that I could only imagine back home.

Go to for text of the Treasury Select Committee hearing.

Go to for a list of British Commonwealth tax havens and for a list of European ones.

Go to for the analysis the UK’s Poisonous Pension Pill for more on Boots and J. Sainsbury.

Go to for details from Thomson Financial on US investment into European private equity last year.

Go to this 2005 article from the NY Review of books for a comparison of US employees rights vs. European ones and some interesting statistic and books on the topic.

***Guy Hands, chief executive of Terra Firma has come out in defense of the current tax treatment of carried interest this morning.

*** Finally, an administrative note. Thank you for having me, Amanda Palmer, as your guest editor today. Dan returns tomorrow …

Top Three

PE Week Wire Exclusive: The investment arm of the Greek bank Marfin Popular began book building today to raise €5.19bn through a rights offering for investment in South East Europe making it the largest fund of its kind in the region. This target seems ambitious especially considering that Greece itself has virtually no private equity activity. But it was revealed exclusively to PE Week Wire today that the Athens-listed private equity fund has already raised €2.5bn, according to sources close to the firm. Dubai Financial has agreed to invest €500m in aggregate. In addition, key members of the ! company’s management may make significant personal investments in MIG’s shares. Andreas Vgenopoulos, the chief executive officer of Marfin Popular Bank, has indicated that he will invest in a further 1% of total proceeds of the share capital increase, while former Burger King chief Dennis Malamatinas, now chief executive officer of MIG, has indicated that he will invest in 0.4% of the total proceeds. Marfin Popular Bank, MIG’s largest shareholder, will not exercise its rights to subscribe for new shares in the rights offering although it has reserved the right to sell a limited number of its shares with the accompanying rights. Assuming all of the offer shares are sold in the global offering, MPB’s stake in MIG will be reduced from approximately 97% to 6.5% following the completion of the share capital increase.

Warner, the US music giant, is considering a 300p per share bid for EMI, trumping an agreed US$7.9bn offer from Terra Firma. Warner Music could attempt to gatecrash Terra Firma’s £4bn (US$7.9bn) bid for UK music group EMI, despite recent suggestions that the US music giant could negotiate directly with the UK private equity firm for EMI’s recorded music business following completion of the take-private. Weekend press speculation surrounded EMI’s share price closing on Friday at 273p, well above Terra Firma’s 265p per share recommended offer, suggesting the market expects a counterbid.

Cinven has agreed to buy BUPA’s hospitals for £1.44bn (US$2.8bn). It is Cinven’s intention that the business increases its level of capital expenditure to a level significantly in excess of the £25m-£27m recorded over the past few years. BUPA’s hospital group is the third largest provider of private medical services in the UK. Its 2007 revenues are forecast to be £457m with normalised EBITDA of £100.2m. Cinven’s sector experience includes its ownership of Partnerships in Care, a UK provider of specialist mental health and related services. It has also made investments in Générale de Santé in France and General Healthcare Group.It combined General Healthcare with Amicus in 1997. UBS advised Cinven. Debt was underwritten by HBoS and RBS.

Buyout Deals

Macquarie Airport Luxembourg has sold its 44.68% stake in Aeroporti di Roma for €1.24bn to Gemina, which gives the Italian investment company just over 96% control of the Italian airport operator. The deal is expected to close by the end of July 2007 and ends months of disagreement between Macquarie and Gemina over the best way to improve the ageing infrastructure at Rome’s Ciampino and Fiumicino airports. Gemina will finance the deal through a bridge loan of up to €1.4bn issued by Italian banks Mediobanca! and Mediocredito Centrale.

Blackstone the buyout powerhouse is backing the management buyout of Intelenet, an Indian business process outsourcing company. The consideration has not been disclosed but the deal is thought to be worth around US$200m. Intelenet is being sold by Barclays Bank and Housing Development Finance Corporation, which set the business up as a joint venture in 2004.

TA Associates, the US$10bn, Boston-based buyout house and Rho Ventures, the Palo Alto venture arm of Rho Capital Partners, completed a majority recapitalization of intranet provider IntraLinks. Rho has been a major shareholder in IntraLinks since 2001, and will continue to hold a significant stake in the company. Terms of the transaction were not disclosed.

RJD Partners is leading a BIMBO transaction worth £50 million for the purchase of specialist fleet outsourcing business TransLinc. TransLinc is one of the country’s foremost suppliers of specialist vehicles to local authorities, primarily on a contract hire basis. The business has significant potential for consolidation.

PE-Backed IPOs

Ascendas India Trust, owned by a Singaporean office and industrial parks manager, plans to raise up toUS$325 million in a Singapore listing in July. Ascendas India, which last week launched a US$325 million property fund focused on Indian office projects will sell 425.3 million shares with an overallotment option of 10%. The funds investors include Bahrain-based asset manager Arcapita, and the Dutch bank ING’s Private Banking arm.

PE Exits

Focus DIY was sold to US hedge fund Cerberus for a quid. Cerberus will pay a nominal £1 for the company, pay off its £174m debts and give £40m to bondholders. The deal will see private equity houses Apax and Duke Street Capital exit the do-it-yourself shop, which they bought in 2002.

3i the Swedish lower mid-market private equity firm Litorina Kapital, together with the founding families, have agreed to sell their stake in Q-Matic Holding, a queue management systems company, to Altor Fund II. Although the purchase price is undisclosed, the transaction represents a money multiple of more than 9X the owners’ original investment.

Firms & Funds

Hotbed Group Limited, the UK’s largest syndicator of private investors, has reported an operating profit before goodwill of £609,000. Revenue increased by 112% to £3.6 million for the year ended March 31 2007. This compares with an operating profit before goodwill in the previous year of £20,000 from revenues of £1.7m.In the five years since its launch, Hotbed, which is unlisted, has raised £110 million of equity from its members for investment in 50 transactions valued at approximately £500 million. Over 60% of this £110 million has been invested in private equity deals, with the balance going into commercial property. Of the 50 investments made ! so far, 38 have been private equity investments.

The Texas-based buyout pro, Tom Hicks, has invested US$400m in a listed SPV indicating that he will be inking a deal soon.

Human Resources

E-Synergy strengthened the team managing the high-profile £30 million Sustainable Technology Fund with the appointment of Sam Richardson as Investment Director.

Richardson will be responsible for identifying and investing in UK entrepreneurs and companies seeking funding of up to £2 million to develop and commercialise pioneering clean and efficient industrial processes. Richardson was most recently a senior manger in the private equity and venture finance team of Noble Fund Managers. Before this he worked on deal origination and investment negotiat! ion and structuring for the Sitka Health Fund VCT which made 17 investments in healthcare and technology companies during his five-year tenure.