The Private Equity Onion

First up a correction to yesterday’s post following a rather “robust” conversation with a chap from Permira. I mistakenly wrote that both CVC and Charthouse were attending today’s Treasury Select Committee hearing. It turns out Charterhouse isn’t; but plenty more are.

Other leading lights called before the committee included David Blitzer, senior managing director at Blackstone who missed the previous meeting because of Blackstone’s IPO, Jon Moulton, the outspoken head of Alchemy Partners, Peter Taylor, the UK managing partner at Duke Street Capital, and CVC managing partner Donald Mackenzie.

Despite the guy from Permira telling me that CVC was not called to the hearing on the basis of the AA/Saga merger, it was inevitably brought up by the committee. Sally Keeble MP asked about what sort of carry such a deal will generate for the firm, to which Mackenzie said that carry is calculated over the 10 year life of their funds, not on a deal by deal basis.

Unfortunately, Mackenzie didn’t give a good enough answer to committee Chairman John McFall when he asked why the new company was being burdened with GBP4.8bn of debt: “We’re here to ask questions, and unpeel the onion of private equity. You’ve been invited here to answer our questions.”

McFall then turned to Moulton, asking for his opinion over the deal. “It’s not the finest PR we could have had, at a time when the industry is under scrutiny,” he said, to which McFall amusingly responded “You’re not a bit jealous that you didn’t get in there first?” “Not a bit. Very!” Moulton retorted.

Moulton was also asked, by Brooks Newmark MP, over the tax treatment of carried interest. “My carried interest is taxed at between 0% and 40%. Taper relief is a small part of that,” he said, adding “You have far too simplistic a view of the tax industry.” He also drew another laugh when McFall, referring to a letter in the FT this morning from Moulton where he called it “bloody wrong” that some are abusing the tax system, by simply saying: “Yes, some people are abusing it.”

Peter Taylor also came in for a bit of fire over the Focus DIY group – Duke Street acquired the business in 1987 and was sold for GBP1 (yes, one pound) in June. Taylor admits that his firm left too much money in the business, although did point out that under Duke Street’s watch, the business grew from four stores to 270.

Taylor was also questioned about Burton Foods, a UK biscuit manufacturer Duke Street owns which has recently announced some job cuts in a factory in Wirral, near Liverpool. Angela Eagle, a Labour MP who has been campaigning against the cuts, is also a member of this very same Treasury Select Committee. It was on her recommendation that Taylor has been called up, and she has proved so far to be one of the most hard-hitting members of the committee – in the first hearing, with the BVCA, things go so heated that she and Conservative MP Brooks Newmark continued arguing out into the corridor after the meeting. When asked about the Burton Foods issue, Taylor replied that the firm’s intention was to grow the business organically and through acquisitions which would result in more jobs.

The assembled private equity heads were then quizzed about how much money their managers put into their funds, the questioner saying that managers only contribute about 1% of their own hard earned cash, so where’s the risk? Taylor said his firm is currently raising a €1bn fund to which staff are contributing 2.5%. Moulton said that very few firms still put in as little as 1%, with some large funds putting as much in as 15%, with senior partners reinvesting their earnings. Blitzer said the average for Blackstone is 6% and Mackenzie said the average for CVC was 1.5%, but admitted that there was LP pressure to raise that.

There was also a question about non-domiciled tax status. Taylor said that eight of his nine London partners are domiciled in the UK (the remaining one in France). Moulton blamed the government for allowing people to earn money here and not pay tax, claiming such people were just “playing the system.” “But I see people who have lived here for 50 years, and they’re not paying capital gains tax. I don’t see how that’s right,” he said.

Chairman McFall then cheekily asked whether these are the same people he referred to as the “enemy within” – he named Sir Ronald Cohen and Nick Ferguson in a letter to the Sunday Telegraph just over two weeks ago. “There may be some overlap between the two groups,” to which he was greeted with a chorus of chuckles. All in all it was a pretty good showing from the private equity guys – it was along similar lines as the previous one, fairly low key, but the committee members did appear more knowledgeable of how the industry works in relation to carry and taper relief.

Encouragingly, straight after the hearing Peter Taylor held a press conference to talk to journalists about it. This is pretty savvy from Taylor (or his PR firm). In times such as these when the media is so hellbent on painting private equity managers as the bad face of capitalism, being more open can only be beneficial.

One of the most frustrating things for journalists is to be told either “no comment” or be denied access to a senior partner. This irritation, mixed with a certain degree of ignorance about the industry, results in the situation the UK has today.

I’m not saying that throwing open your doors so any journalist can walk in for a nice chat over a cup of tea is going to mean that every member of the press is going to fall at your feet – British newspaper make no bones about their ideological leanings – but it will certainly produce a more accurate portrait of an industry which is, in the UK at least, getting a good-kicking from all quarters.