Tuesday, July 29, 2008

Harper makes Canada a safe haven for unwelcome private equity

Other first world cointries are wise to the unwelcome ways of private equity, England is, Canada is not. Harper's actions have been designed to favour investment by private equity and disfavour investment by average Canadians.

Buy-out firms are told that

By Martin Arnold, Private Equity Correspondent
The Financial Times Limited

Published: July 29 2008

Sir Michael Rake, the man charged with policing private equity's new transparency rules, has secured the commitment of 32 buy-out groups and 55 of their portfolio companies to comply with the industry's voluntary guidelines.

Yet, while the British Telecom chairman is encouraged by the response to the new code, he warns that last year's political firestorm over private equity could reignite quickly if a big buy-out collapsed.

Private equity faced a barrage of accusations last year - from job-cutting and asset-stripping, to tax avoidance and excessive use of debt - after bidding for several FTSE 100 companies, such as Alliance Boots and J. Sainsbury, the high-street retailers.

Sir Michael told the Financial Times that, even though the credit crunch had triggered a drop in the size and number of buy-outs, the pressure was still on buy-out firms to prove their value to the economy.

"It has gone quiet for the moment," says Sir Michael, in his first interview since being named chairman of the guidelines monitoring group for the new private equity rules in November. "But those who know understand it could easily come back.

"If there were to be a major failure in a private equity-financed vehicle, then for sure there would be political attention," he says. "This industry isn't stupid and is fully aware this is something we need to do."

With the European parliament debating measures to clamp down on private equity, he warns that some European countries are making "ill-informed assumptions" about the industry. "That is a very dangerous place from which to make policy."

He is encouraged by the enthusiastic response eight months after Sir David Walker, the City grandee, unveiled the voluntary guidelines he drew up for the British Private Equity and Venture Capital Association (BVCA).

Since then, about a dozen private equity firms - including Apax Partners, Terra Firma, Permira and Cinven - have published annual reviews, giving details of their senior managers, investors, strategies and portfolio companies.

"The reports are worth looking at," says Sir Michael. "They see the business benefits of doing it. There is nothing to fear from transparency and the story they have to tell is generally a good one; therefore why not tell it?"

In addition, large portfolio companies, such as Alliance Boots, the pharmacy chain, and Gala Coral, the betting and casinos group, have published public company-style annual reports. By the end of the year, Sir Michael plans to report back on how the rules have been adopted by relevant portfolio companies - any listed companies acquired for more than £300m or unlisted companies for £500m-plus with more than 1,000 staff and generating at least half their revenues in the UK.

By then he also expects to have held talks with a number of Middle Eastern and Asian sovereign wealth funds about complying with the guidelines.

So far only Arcapita, the Bahrain-based Islamic bank, and Dubai International Capital, the Gulf investment fund, have signed up to the guidelines after acquiring large UK companies and becoming members of the BVCA. Both DIC and Arcapita raise money from private investors, so consider themselves more private equity than sovereign wealth funds. Yet other groups with closer government links, such as the Qatar Investment Authority, have not signed up, even though the QIA owns Four Seasons, the troubled UK nursing home operator.

"I was in the Gulf a few weeks ago and the couple of people I spoke to informally indicated they were absolutely willing to go along with what everyone else does," says Sir Michael. His group has appointed PwC to advise it on monitoring the compliance of portfolio companies and Ernst & Young to collate and publish "attribution analysis" data on how private equity groups make their profits.

"To remove this from being a political and fiscal issue to more of a factual issue around where private equity sits in relation to the economy, the creation of jobs and long-term investment, the most important thing to is to get some clarity rather than noise around the facts," says Sir Michael.

His group has the power to expel any funds that do not comply with the guidelines from the BVCA. Yet, he says: "I think that is a real long backstop, but it is perhaps important to have it."

With the UK economy slowing and the financial system in difficulties, private equity's new policeman sees as many opportunities as challenges for the industry. "We do need to understand that companies do go bust from time to time," he says.

"But the ability of private equity to manage through and create more value out of these assets when companies get into difficult situations is a big part of what they do."

Copyright The Financial Times Limited 2008


Robert Gibbs said...

Another LBO Of A Canadian Income Trust

Fording Canadian Coal Trust To Be Bought By Teck Cominco

July 29, 2008 (EDIT)

VANCOUVER - Teck Cominco Ltd. pulled the trigger on a deal to buy the assets of Fording Canadian Coal Trust for about US$14 billion.

Tuesday's bid is for US$12.4 billion in cash and shares worth about C$1.5 billion.

Don Lindsay, president and CEO of Teck Cominco said the structure of the deal is key because of the tax advantages, and the fact the company already owns 20 per cent of Fording.

Teck expects to reap more than US$3 billion in tax benefits from the transaction based on established rules covering the acquisition of Canadian resource properties. It will fund the cash portion largely from a US$9.8-billion loan facility it has arranged with a syndicate of banks.

The deal follows what Fording described as an extensive review of strategic alternatives, particularly in light of the need to address our income trust structure before 2011.

Dr Mike said...

Should it not be the Prime Ministers first priority to protect & allow for the betterment of it`s citizens.

Instead in this country , we get the shaft.

That shaft comes compliments of the Prime Minister himself---implemented by minions like Jim Flaherty.

They are letting private equity run wild at the expense of everyday investors & at the the expense of the tax payer.

They seem to have the attitude that selling-off to private equity is a "good Thing".

The taxpayer suffers with higher personal taxes to offset those lost as these huge deals take place.

The investor loses another investment vehicle.

A lose-lose situation brought to you by the man that is supposed to be looking out for your best interests.

Sucks to be us!!

Dr Mike Popovich.

Anonymous said...

The damage caused by private equity funds' LBOs has been a source of grave concern in Europe. Former Danish Prime Minster Rasmussen has been leading a campaign in the European Union for controls. Now the British (some of them) are joining the movement. In the aftermath of the LBO of the previously privatised Danish Telecom I believe that the Danes introduced a law regulating the activities of foreign equity funds. The tax leakage resulting from the Telecom LBO (16% of all corporate taxes if I remember correctly) was so large that the Danish authorities were up in arms. A 15% reduction in personnel also raised the ire of Danes. Here in Canada our Humpty Dumpty "leaky" Flaherty sees imaginary tax leakage where there is none and causes and promotes real leakage where there was substantial tax revenue.