SIR DAVID WALKER

11 DECEMBER 2007

  Q60  Mr Simon: Let's be clear on that, because that is not what anybody else is interested in. Nobody else is interested in an understanding which merely helps them to understand the economic impact of the industry as a whole. Everybody else is interested in the actual behaviour of the real act in the real world and the effect on the jobs and so on of real firms of private equity practitioners. People are not simply seeking to understand the macro level economic impact of the industry, that is not what is at issue at all, and if that is all you have been looking into you have been looking into something that is of no interest to everybody else.

  Sir David Walker: Our fundamental disagreement plainly continues. I think it is of very great importance to understand the economic impact of private equity on the whole economy.

  Q61  Mr Simon: You said it was the fundamental matter you were looking into, and if that is the main thing you are looking into and if you are not looking into the actual specific micro level behaviour of specific firms and specific cases and how they transact their business in the market place and how transparent that is to the rest of us, if you are not even claiming to treat with that, then you are missing the point, are you not?

  Sir David Walker: No, and I am. The enhanced openness that I have called for, and we have been through the requirements I have, let's take the business review provisions, require the portfolio company to reveal in their report and accounts all the things that Section 417(5) requires, so a lot is being revealed about the behaviour of portfolio companies, and on the websites and in the annual reviews of the private equity firms much more is now to be revealed. For example, let me take something very specific which is very relevant for employees in a portfolio company. Who is the individual in this hitherto anonymous private equity firm who is responsible for this 100 per cent stake in the company in which I work? I am requiring that to be revealed. That veil of anonymity has been cut through, and there are many other examples. My point, and I apologise if this is tedious but nonetheless I do not resile from the weight I attach to it, I just do not agree with the proposition that I am saying it is the only thing that matters, is that we need a better understanding of economic impact. I had thought in July, before I listened to the consultation process—which this Committee would surely have wished me to do and I did in relation to some recommendations the Committee made—that simply adding the attribution analysis results of individual firms would give us a good story. I have indicated to Mr Mudie in our exchange why I think that would not be accomplished and why I think it is important to have this template. When we have the template it will indeed be possible to do what you say is very important, which is to require individual firms to produce their own attribution analysis to my standard. Now, if that is important, then that can be taken into account as the discussion in this area evolves, and Sir Mike Rake or whomsoever could determine that that should be required. Then the degree of let's call it openness or transparency that you seek would be available. What I will not do, Mr Simon, is put my name to something which would give a perverse incentive, and I have to say, looking in Westminster, this is what legislation very frequently does, and there is abundant experience of it in certainly the financial regulation and legislation over the 30 or 40 years of my working life, and I wish to avoid it here.

  Q62  Mr Simon: Are there any major private equity firms or practitioners of any note who are not with the BVCA?

  Sir David Walker: Yes, there are some, including I discovered the other day Morgan Stanley though, as I have said, my independence goes both ways. I have not sought to influence Morgan Stanley until now and they have certainly not sought to influence me, but I think you can rest assured Morgan Stanley are about to become a member of the BVCA, and there are one or two others who have been on the margins of private equity, not very large in scale but who aspire to get into it in a bigger way.

  Q63  Mr Simon: Would it be fair to say that about five years ago there would have been an awful lot more private equity firms that practised private equity in the United Kingdom but which were not members of the BVCA?

  Sir David Walker: Pass, Mr Simon. I do not know.

  Q64  Mr Simon: I think you can take it from me there would have been, in which case how can it be such a draconian sanction for a potential future firm to be potentially excluded from the BVCA when even now, and very recently, there were a lot more people who with no sanction at all voluntarily choose anyway not to be in the BVCA just as a lifestyle choice?

  Sir David Walker: My expectation is that the firms authorised as private equity firms by the Financial Services Authority who are significant, and I will give here an example of the way I have tightened up my requirements since July, will choose to join the BVCA as a matter of good practice. They will want to be firms being seen to be conforming to best practice in this industry, and I have tightened up my requirement in that respect. In July I said that private equity firms who had portfolio companies above the threshold report and had to produce the annual review. I have now strengthened that and said private equity firms that have funds, not necessarily a portfolio company in the United Kingdom, with the capacity and stated intention to invest in the United Kingdom should conform to my guidelines.

  Q65  Mr Simon: My question was, given there are firms who already choose anyway not to be in the BVCA, why should we believe that it is going to be such a draconian disincentive to be excluded from something which some people choose anyway, having done nothing wrong?

  Sir David Walker: I do not think there are more than two or three—I do not know. I do not think there are any very large private equity firms—

  Q66  Mr Simon: But if there are even two or three why would I be so terrified to be the fourth? Why would it be such a terrifying sanction?

  Sir David Walker: I really do not understand the thrust of the question. I think they will join the BVCA and they will wish to be seen to be good citizens in conformity with these guidelines.

  Q67  Mr Simon: But surely the whole point of this inquiry and the huge furore at the national level that there has been is that they do not seem to care whether people think they are good citizens or not?

  Sir David Walker: If I may say so, Mr Simon, you have disregarded the change in the atmosphere in the last six or nine months, partly as a result of the process that led to this report. I can tell the change in the temperature and I can only say this to you from my own discussion with these firms; you can take a cynical view and say: "Well, they would say that, wouldn't they?" That is not the view I take. In the discussion, for example, in the advisory group that I have assembled, and in my discussions with many firms not in the advisory group, to go back to the words I used right at the beginning in the answer to the Chairman's first question, they have acquired in our mature society very substantial ownership rights and they have not recognised they have obligations which are assumed to go with it, and all I can do is assure you with all sincerity I think the atmosphere has changed, and in a way the justifiable response to that from someone who is reasonably sceptical which would be perfectly justified is that we have to wait and see whether the enhancement in performance is as great as I am optimistic it will be, and that is a matter of time.

  Mr Simon: Thank you.

  Q68  Mr Fallon: Sir David, are you not concerned about the unlevel playing field that is now being created in that you have private companies on the one hand, publicly quoted companies on the other, and now this new tier of Walker-style companies in the middle?

  Sir David Walker: Yes, I am concerned about it, though, with respect, we cannot have it both ways. A lot of the criticism and challenge, for example in this Committee and certainly the media, was that what I put in place was too soft or a whitewash or whatever but presumably, if it were not so and if it were tough, that has increased the gap between private companies and private equity, so certainly there is a problem of the kind you describe. My belief is that here it becomes tentative; my belief is it would be useful, going forward beyond the remit I had focused on private equity, to identify the most private equity like companies/investors, and we should think very hard about how to invite the sovereign wealth funds and some of the individuals who behave like private equity in committing a lot of capital of their own but taking on leverage into this camp. It may surprise the Committee that I express this view but I do not think it will be very difficult to get the sovereign wealth funds to come in, and the reason is that when they want to do something in the United Kingdom, like making a substantial acquisition, it is hugely in their interest to have this House, the media, and shareholders receptive to what they want to do, so their commitment to conform to guidelines like these is rather a positive for them, which is precisely what we found when I talked to the Qatari Investment Vehicle and Delta 2 at the time when they were interested in acquiring Sainsbury's. So I think there is a discussion with these people to be had to enlist their voluntary conformity with these guidelines. I am vulnerable to criticism: "Why did you not bring more of them in so I could tell the Committee they were all signed up?" Well, I tried in not a half-hearted way; I talked to several people in the Middle East; the problem was I realised very rapidly it is quite hard to expect people to sign up to voluntary guidelines when I could not tell them what the guidelines were going to be precisely.

  Q69  Mr Fallon: But how will the BVCA or the new monitoring body get the sovereign wealth funds, or indeed the larger private companies, to comply?

  Sir David Walker: My proposal to the BVCA, and I have discussed this at length with Simon Walker who has just been appointed, as you know, as the new chief executive of the BCVA, is that he, in the case of the sovereign wealth funds, after discussion with Treasury/Foreign Office, and there needs to be some dialogue because of the sovereign nature of this, should actually talk to these people, and I have indicated to him what I think the priority targets ought to be and I think it is his intention to get on with it. But, Mr Fallon, it will require greater urgency and immediacy and potential leverage and influence when there is a renewed situation vis-a"-vis Sainsbury's or some other large name like Mr Tchenguiz, for example, who is in my understanding private equity-like; he is here in the United Kingdom and I think is available to have a conversation with, or his advisers, to enlist his support.

  Q70  Mr Fallon: But why should these guidelines not apply also to large private companies, for example Richard Branson's companies, or Philip Green's companies?

  Sir David Walker: I did not say they should not—

  Q71  Mr Fallon: But do you think they should?

  Sir David Walker: If they are private equity-like, and in my view what appears to be being proposed in the case of Northern Rock by Mr Branson's—let's call it consortium, looks very private equity-like to me, so I think the answer is yes.

  Q72  Chairman: Sir David, I mentioned taxation earlier. Previously we had Jon Moulton of Alchemy Partners here and he made the point very clearly for us on management fees when talking about the act of not paying tax, "First set up a partnership to run the fund. The UK Limited Partnership contemplated by the memorandum of understanding of the BVCA and Her Majesty's Revenue and Customs is perfect. Consider a thousand million pounds fund with a 1.5% annual `management fee' payable to the private equity firm as the general partner. The general partner is entitled to draw £15 million per annum from the partnership. What the agreement says is that he can pick and choose which of the partnership's cashflow he gets the £15 million from. The point is that GPs (general partners) get taxed on the cash flows depending on the character of the cash flows but being intelligent general partners select non taxable cashflows, for example the repayment of a loan at par, which do not appear on tax returns at all. This is easy to arrange". Now, I mention that to you as part of the background where suspicion is prevalent and there is a need to try and demolish that. Finally, you have mentioned yourself that private equity is private to the extent of secrecy. I am grateful to you, as Chairman of the Committee, for your courtesy to me and the Committee for keeping us informed of your deliberations, and I think you have made a valiant effort. We realise that private equity is here to stay; the focus was on highly-leveraged buy outs, and certainly those private equity firms who have spoken to me over the months want to remove themselves from the limelight, but to do that there has to be meaningful engagement and transparency. I would put it to you, Sir David, that your report fails to tackle or does not go far enough on a number of big issues. It is silent on taxation, and I mentioned to you that point; vague in communication with employees and other stakeholders; nothing on executive remuneration; watered down attribution analysis; discretion on reporting requirements; uncertainty about how and whether compliance will be in force and, if it is in force, then people leave the BVCA and the guidelines do not apply and they go on their merry way, and, as Mr Fallon says, there is no level playing field with other private firms. Is not the consequence that your proposal will satisfy no-one; you will continue to be disliked by the private equity firms in your works on that, and you will continue to be viewed with suspicion by stakeholders? I put it to you, Sir David, does Will Hutton have a point when he says in describing your code that it is one of the less honourable moments in private equity history?

  Sir David Walker: I listed mentally in the observations you made about 15 points and I think my observation on them—and I do not know whether I have time to respond—is no, no, no, no and no! But if I could start with a matter which is not my responsibility—how could it be and I do not believe you are seriously suggesting it should be—Jon Moulton and others have mentioned practices of the kind that he has mentioned to you and my reaction as a United Kingdom taxpayer is one of revulsion from them, and if that sort of evasion—because that is not avoidance; I think that is evasion—is going on then it is a matter for HMRC and the Treasury to deal with it, and I feel as strongly about that as anyone. I did not write down the specific points you made but if I take some of them I have explained why I believe the voluntary guidelines approach is the right approach and I think Parliament will be singularly ill-advised to seek to legislate across the board in this area, though, to take a point that was made I think by Mr Cousins, if you look at 4175, I think there is a perfectly good case for saying something like that should apply to all big private companies.

  Q73  Mr Cousins: Indeed.

  Sir David Walker: As to communication with employees, and I have forgotten the adjective you used but I think it was something like "inadequate", I attach very great importance to that.

  Q74  Chairman: "vague".

  Sir David Walker: I do not think what is in place is vague: we have powerful provisions in the statute, one of which, according to the TUC, needs to be enforced more effectively, and I have laid out very clearly why I think it is important for private equity firms to communicate at inflection points in their lives. As to the attribution analysis, I am hesitant about saying any more. There has been no watering down.

  Q75  Chairman: Sir David, can we thank you for your assistance to the Committee and for the opportunity to discuss this Report. As I have mentioned, you have always been very open and courteous with us, and I thank you for that.

  Sir David Walker: Thank you, Chairman.