Examination of Witnesses (Questions 220-239)|
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
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 dateor 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
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
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
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 1989we were rated as one of the
top five Fortune 500 companies for our portfolio of companieswe
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
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
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.