Brooks Newmark on Private Equity Funds

Brooks Newmark dismisses fears about the private equity industry and highlights the considerable growth in that industry and welcomes the British Venture Capital Association's working party to consider issues of transparency and disclosure.

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Mr. Brooks Newmark (Braintree) (Con): I feel that this is a bit like round two of a debate that I had with the right hon. Member for Oldham, West and Royton (Mr. Meacher) on Radio Four's "Today in Parliament" programme last Friday. I was in the private equity industry for 14 years, and I declare an interest in this debate and draw hon. Members' attention to my entry in the Register of Members' Interests.

Listening to the right hon. Gentleman, I get a bit of the whiff of the 1970s. It brings me back to my teens. I can only assume that his campaign slogan for the Labour leadership will be "Back to the future with Michael Meacher". The reality of private equity bears no resemblance to the Beazer comic book analysis of private equity that, unfortunately, we have just heard.

I want to touch on several areas. On jobs, roughly one in six jobs in the private sector involves private equity. The right hon. Gentleman is absolutely right to be concerned about the relationship between private equity houses and the employees because they employ a lot of people, but jobs in firms controlled by private equity have grown much faster than in FTSE 250 or FTSE 100 companies.

Sales growth in private equity companies is roughly at 9 per cent. per annum. Again, the FTSE 100 companies grow at 7 per cent., FTSE 250 companies at 5 per cent. Again, exports by private equity-controlled firms grow at roughly 6 per cent. per annum, which is much faster than the national average of roughly 2 per cent.

Mr. Meacher: I referred to that in my speech. I commented on the fact that the British Venture Capital Association report, which is, I think, far and away the best evidence, indicates that what the hon. Gentleman said is true at the lower end of the market and for the smaller companies. However, when one looks at the smaller number of very large companies, that is not what the respondents are saying. The results are either the same or worse than under ordinary conditions. Private equity does not display the improvement that he claims.

Mr. Newmark: The BVCA analysis relates to all private equity companies. About 1,500 companies were invested in last year. Therefore, it covers the gamut; we are talking about private equity as a whole.

The final nail in the right hon. Gentleman's argument is to do with the notion of asset stripping. The reality is that investment by private equity firms grows at about 18 per cent. per annum, compared with the national average of about 1 per cent. per annum. Therefore, jobs are up, sales are up, exports are up and investments are up; so much for the accusation of casino capitalism, to which the right hon. Gentleman alluded in his speech.

The private equity industry invested £11.5 billion in 1,500 companies in 2005 alone. This country has a 50 per cent. market share in Europe; that proportion is three times higher than that of our nearest competitor, which I believe is France. The City loves private equity because £3.3 billion in fees is paid to the financial services sector, the Treasury loves private equity because private equity firms pay £26 billion in taxes, and, most importantly, the pension funds love private equity because private equity firms deliver superior returns.

The question is: where does the problem lie? It does not lie in the preferential tax treatment. The Economic Secretary admitted in a speech at the London Business School that all companies pay taxes on a level playing field. There is no special treatment for private equity firms. The problem is not to do with asset stripping either, because, as I mentioned, investment by private equity firms is 18 times higher than the national average. The problem is also not to do with just a few people lining their pockets, as the right hon. Gentleman implied. In my experience of private equity firms, the interests of the owners, the managers, the directors and the employees are aligned. Traditionally, most private equity firms have given share options to employees far deeper into the structure than have ordinary public companies or most companies in general. Therefore, when money is made, everybody is a winner, and when money is not made, no one makes money.

Mr. Gauke: My hon. Friend is making an important point. Does he agree that the following is the business position of a private equity fund: the intention is to acquire an investee company and to make money by disposing of it at a profit, and it will be able to do so only if it is disposing of a successful business that is making profits and providing a good service to its customers?

Mr. Newmark: My hon. Friend must be a mind reader, because that was precisely the point I was about to come on to.

We should consider what the pension funds do. They are among the biggest backers of private equity, and I assume that they would not back private equity if they felt that there was bad behaviour or poor governance, and if by backing PE they were not giving good returns to pensioners-in a trade union, for example, such as the GMB which I know invests in private equity. As my hon. Friend said, the reality is that private equity firms target underperforming assets and are a force for change, improving productivity and growth. Whether one is putting a company through the initial public offering-IPO-process or selling it on to somebody else, no one is going to buy it if they do not see continued opportunity for growth in it.

The key problem is to do with transparency. The right hon. Member for Oldham, West and Royton made an important point on that. When I began working in the private equity industry, buying a £25-million company was a big thing, but today there are billion-pound transactions-such as, potentially, those involving Sainsbury's and Boots. Therefore, the impact on the economy, employees and on people in general who are customers of such businesses is much bigger. Private equity has grown from a cottage industry to a more mature industry, and more transparency is needed. That is why I welcome the initiative of the BVCA in setting up a working party under Sir David Walker. Issues to do with transparency and governance are important as the PE industry continues to mature.

I remind the right hon. Gentleman that the Prime Minister, the Chancellor and the Economic Secretary have all welcomed the benefits that private equity brings to UK plc. It seems that even the Secretary of State for Northern Ireland has undergone a Damascene conversion. I was interested to read that he said in a Financial Times article of 20 February 2007 that

"equity funds can be important...and it is essential that we have a tax system that enables the City to remain the pre-eminent financial centre of the world...a return to Old Left solutions of punitive taxation is not the answer. Nor is heavy regulation".

I wonder whether the Economic Secretary might whisper a bit louder into the ear of the right hon. Gentleman.

Let me conclude by saying that I hope that the Economic Secretary will join me in applauding the achievements of the private equity industry, and that he will continue to safeguard Britain as a centre of excellence for private equity.

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