Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 220-239)

MR DAMON BUFFINI, MR DOMINIC MURPHY, MR PHILIP YEA AND MR ROBERT EASTON

20 JUNE 2007

  Q220 Chairman: Welcome to the Committee. Please identify yourselves for the record, starting with Mr Easton.

  Mr Easton: I am Robert Easton from the Carlyle Group.

  Mr Yea: I am Philip Yea, chief executive of 3i.

  Mr Murphy: I am Dominic Murphy, partner at Kohlberg Kravis Roberts.

  Mr Buffini: And I am Damon Buffini from Permira.

  Q221  Chairman: Blackstone has informed us that it cannot give evidence to the Committee at the moment for reasons set out in a letter that is available to the press, but it will be available to give evidence at a future date. Before I commence questions, this Committee is aware of the need to distinguish venture capital from LBOs. We do not want to discourage the use of tax incentives for companies to grow businesses and for entrepreneurship to flourish and other aspects of business to flourish. We also do not want to damage any family businesses. I have visited a number of family businesses in the past few years for which I have great regard, for example a whisky company in my constituency. We want to look at the unique elements of private equity and ensure that his inquiry is an informative session so we can build on the evidence we have received and communicate with the various authorities, whether it be HMRC, Sir David Walker- we will inform him of the results of our inquiry to date—or the Treasury. With that in mind, I start off the questions on the issue of transparency and the social side. I note that the other day Jimmy O'Neill of Goldman Sachs said that as private equity's impact grew it had an obligation to do more on the social side. He has also said that the industry's secrecy makes it an easy target. What are you doing on the social side?

  Mr Easton: First, we do a tremendously good job with our investors on communications and an equally good job with our customers, our major stakeholders in businesses. What David Walker's review puts under the spotlight is the need to do more with our employees who I accept are stakeholders in our businesses and his review will address that issue. On the social question, in Carlyle's portfolio companies in the UK we have excellent relations with various unions, particularly the GMB which was represented earlier. As an industry private equity can and should do more in its social responsibilities. I am, however, responsible for certain chemical companies. Where we have an obligation for example to meet environmental health and safety legislation we fully co-operate and abide by the laws in whatever land we happen to be.

  Mr Murphy: From our perspective, we believe in transparency and a fully motivated and informed workforce. KKR's general philosophy over the past 31 years is to inform all its stakeholders of its strategic objectives. In relation to Alliance Boots, from the day of the announcement we have been communicating with the media, the unions and politicians. Indeed, I sent a letter to the Chairman of this Committee. I have met the Treasury and written to the Department of Health. We believe in strong communications and that is a very healthy perspective to take.

  Mr Buffini: I agree with Mr Murphy. We believe in very strong communications. Further, we think that to be a company in society we have to engage with employees and the social fabric. I give a couple of examples from our portfolio. New Look has just appointed a CSR director. Gala Coral which is one of our leveraged buyouts has volunteered 2,000 hours of employee time in its head office alone in Nottingham to engage in something called the Right to Read programme. It has also recycled 10,000 tonnes of bingo tickets. Those are absolute examples of how we are engaging in that.

  Q222  Chairman: Have you produced an annual report?

  Mr Buffini: No, but the AA has produced a 50-page annual report.

  Q223  Chairman: Mr Murphy, do you have an annual report?

  Mr Murphy: It varies case by case in terms of the length of the report and size of the company.

  Q224  Chairman: Is there an annual report on your company?

  Mr Murphy: Yes. KKR has a review of the company every year.

  Q225  Chairman: Is that available to the public?

  Mr Murphy: A lot of it is available on the website, so effectively yes.

  Mr Easton: Our annual report runs to probably more than 100 pages. It is essentially a download of our website.

  Q226  Chairman: I just picked up the 3i annual report which is 113 pages long. It refers to "Our purpose, our vision, our strategy." There is a chairman's statement by Baroness Hogg and a corporate responsibility report on page 40. That illustrates its philosophies and responsibilities. It has an investment policy. As an industry you would not find yourselves in the position you now face, real or otherwise, if you had annual reports of this kind and you communicated with people. With that in mind, what can you do further on the social side, Mr Yea?

  Mr Yea: Thank you for that. We were pleased to receive an award for our previous year's social responsibility report. We were the best of all FTSE companies. Clearly, the issue of transparency is moving. We welcome the Walker commission. We made submissions to it and we shall continue to work with Walker because we believe this is an industry that is easily explainable.

  Q227  Chairman: Why do you think it has not been explained to date?

  Mr Yea: As the previous witnesses said, the importance of the industry has been growing and people have been concentrating on delivering returns for their investors, many of which are pension funds.

  Q228  Chairman: But you are different from the rest of them here in that you are a listed company.

  Mr Yea: Indeed.

  Q229  Chairman: Am I correct that you do not charge carried interest?

  Mr Yea: I personally do not benefit from carried interest, but there are 150 or 160 of our people throughout the firm who receive part of the carried interest schemes. We receive carried interest as a firm from many of the funds that we manage, so carried interest is integral to what we do.

  Q230  Chairman: In terms of the private equity boom, I note the comments of Jim Chanos, the founder and president of Kynikos Associates, the world's largest dedicated short-selling hedge fund. He says that he has a problem with private equity in that it depends upon an amazing discontinuity and arrogance which is that the stock market is totally underpriced at all times and it is unbelievable to think that the market is stupid at all times. Is he right?

  Mr Murphy: I do not agree with that opinion.

  Q231  Chairman: Why?

  Mr Murphy: If you look at KKR's track record, which extends to 31 years across many economic cycles, even those dating back to 1989—we were rated as one of the top five Fortune 500 companies for our portfolio of companies—we have generated for tens of millions of pensioners 27% compound returns. That has occurred through many economic cycles, good times and bad. I believe that the learning we have had over those 31 years will stand the firm in very good stead in future.

  Q232  Chairman: I would like all of you to keep that in mind. Mr Easton, he also says that what is driving it is easy credit availability and the boom in structured finance whereby lenders parcel out loans in various collateralised obligations and investors buy small pieces as they see fit. That has defused the risk but the risk has not been eliminated. Do you have sympathy with what he says?

  Mr Easton: I think that the risk is super-diversified across the economy.

  Q233  Chairman: By "super-diversified" do you mean that a lot of small people will perhaps get a sore face but nobody will be killed?

  Mr Easton: The FSA has looked at exactly that question and considered closely whether a failure in a buyout in the United Kingdom would have a systemic impact on the UK's economy. The FSA has been quite explicit that it does not believe that is the case. If I may just pick up your public company/private company comparison, I spent six years of my career in public companies at a very senior level in the UK and I have spent six years in private equity. The fact is that what Mr Murphy says about returns is true. Private equity has generated higher returns relative to public companies and as a consequence pension funds, including I imagine the GMB's pension plan, have shifted their allocations towards private equity for that reason.

  Q234  Chairman: Do you have any comments on that?

  Mr Buffini: I do not have any further comments. I think the FSA has been pretty clear as to what it thinks about systemic risk; it thinks it is low.

  Q235  Chairman: Mr Yea, the private equity industry seems to be in a state of chaos. Since its last meeting with us we have had the resignation of the chief executive of BVCA. People have contradicted one another. It seems to me, if I may use the expression, that they are all fighting with ferrets in a sack. This industry needs to get itself sorted out. How can it go about it to prevent people turning on one another, even some calling others in the industry the enemy within?

  Mr Yea: It is very important that we get on the front foot and explain the benefits of the industry. To go back to an earlier question, we make about 60 investments a year and take part in only two public to private transactions.

  Q236  Chairman: But how does the private equity industry get its act together?

  Mr Yea: I think that it is getting its act together. It has explained that the private equity form of ownership has helped to create—-

  Q237  Chairman: Do you really think that in the past week it has got its act together?

  Mr Yea: I think that focus on a particular issue that was played in a particular way caused this issue to arise. I am here to help put forward the case for the industry.

  Q238  Chairman: But there is not a unified voice coming from private equity, is there? It is not helping itself. Do you agree with that?

  Mr Yea: No. In the earlier presentations people tried to differentiate one part of the industry from another. This is a broad industry from venture capital through to buyouts.

  Q239  Chairman: So, we are all agreed that the industry has unanimously got its act together?

  Mr Yea: No; I think there is more to be done.

  Mr Murphy: It is very difficult because it is to ask whether everybody in the FTSE has the same opinion. The private equity community is very broad-based and comprises a number of different firms. To expect everyone to have an identical perspective would be unusual.


 
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