UK - Third Meeting of the Treasury Select Committee

Asked about what he thought of the AA/Saga deal at the third hearing of the Treasury Select Committee today, Jon Moulton replied, “It was very large and very profitable. It's not the finest PR we could have had, at a time when the industry is under scrutiny.” John McFall MP, the Chairman of the Committee, responded teasingly that perhaps he was a bit jealous. “Not a bit, very,” remarked Moulton. The atmosphere of this final fact-finding session seemed less charged, theatrical and emotional than the previous two. Moulton was one of four investment professionals in the hot seat alongside Peter Taylor of Duke Street Capital, Blackstone’s David Blitzer and Donald Mackenzie from CVC. Private equity held its own at this meeting. The buyout chiefs were preceded by Sir David Walker who offered a taster of his forthcoming working committee findings. Having been appointed by the BVCA, Walker asserted that he was addressing the report for everyone with an interest in the British economy, especially non-private equity stakeholders, not the BVCA specifically. His belief that “there is a need for greater openness in this space” is to be followed by a voluntary code of disclosure which will be under continual review to keep up with the fast-paced nature of the industry. The MPs and trade union fixation with private equity-backed public companies will not gain them much ground – unquote’s exclusive IPO tracker reveals that the overwhelming majority of private equity-backed companies perform very well on the public markets once listed. Star achievers include Carter & Carter, whose share price is up over 200% on its February 2005 backing. Bridgepoint had backed the company in 2001. Dignity Caring Funeral Services, backed by Montagu in 2002, is up nearly 200% since its flotation in April 2004. Barclays Private Equity-backed Admiral Group is up more than 150% since its headline-grabbing IPO in September 2004 following a five-year courtship by its backers. Quizzed on the issue of excessive leverage Blitzer was clear: “I don’t believe there is excessive leverage being used. The level of leverage is high but it is below all time highs and there is no systemic risk in the system.” Moulton agreed with Sally Keeble MP that there were “enormous parallels” between the European leveraged loan market and the US sub-prime market and that it was likely the latter would face similar problems. Blitzer countered that the level of due diligence undertaken by buyout groups and the fact that private equity owned the businesses it invested in differentiated it from the crisis-stricken sub-prime market. “50% of private equity funds don’t make any carry,” according to Mackenzie. Yet professionals do risk their own cash in the fund, MPs were told, with GP contribution amounting to 1.5%, 2.5% and an average of 6% for CVC, Duke Street Capital and Blackstone funds respectively. In addition to relating this fact, the private equity representatives urged the MPs to remember they were only talking to top-quartile funds. Allegations of tax abuse and the suggestion that different levels of taper relief might be suitable for different risk-profile deals were also well rebutted. “It’s very difficult to determine the risk-profile of a deal. What is riskier or not is all subjective,” commented Blitzer. Moulton’s suggestion, however, that LPs had not been assertive enough in the past and this had enabled larger funds to profit disproportionately from terms and conditions would not have endeared him to Blitzer and Mackenzie. After battling through numerous untruths and generalisations, it seems a more reasonable discourse has emerged. The industry now has two weeks to digest the Treasury Select Committee before Sir David Walker publishes his findings.