Private equity bosses admit mistakes

Private equity executives left a UK parliamentary inquiry on Tuesday seeming happy they had cleared a potentially tricky hurdle by adopting a humble attitude and admitting to past mistakes.

Unlike the hostile interrogations that MPs unleashed on several of their competitors and trade representatives at the two previous Treasury select committee hearings, the tone of Tuesday’s session was more conciliatory.

Bosses from Blackstone, CVC Capital Partners, Duke Street Capital and Alchemy Partners admitted they had made some errors and promised to do better. MPs seemed more relaxed and prepared to take them at their word.

Peter Taylor from Duke Street conceded his firm made mistakes in the refinancing of Focus DIY, the home improvement retailer sold for £1 after struggling to repay the interest on its debt. “With hindsight, yes we put too much debt into Focus DIY.”

The Duke Street managing partner also said he would be happy to pay a higher tax rate of 15 to 20 per cent on carried interest (the share of profits paid to partners) if it meant the rules were simplified.

The calm atmosphere suggested the industry is coming to terms with its growing role in the public spotlight and accepting that some change is inevitable. MPs seem to have mellowed as they learned more about the industry during their inquiry.

Angela Eagle, the most combative member of the committee, was absent, prevented from attending by her recent appointment to the government. But the buyout titans also learnt from the mistakes of their rivals who appeared before MPs last month.

Instead of baldly asserting that nothing was wrong in the private equity world, as their predecessors had done, they adopted a more modest tone.

Donald Mackenzie, managing partner and co-founder of CVC, admitted that its flotation of Debenhams and the subsequent fall in the share price of the UK retailer had hurt his firm both financially and in terms of “reputation risk”.

“We are still the largest shareholder in Debenhams so any downturn in its share price has been felt by us. It is also a reputational risk issue as we rely on the London Stock Exchange and have floated four companies on it,” said Mr Mackenzie.

The wobble in investor confidence shaking debt markets prompted Jon Moulton of Alchemy to concede the private equity sector was “somewhere near its top” after banks were forced to scrap or scale back a number of debt issues to fund leveraged buyouts.

David Blitzer from Blackstone said his firm stress-tested every asset it bought to see how it would stand up to a recession. “It is not the case that we think the good times are going to continue for ever,” he said.

The modesty and honesty seemed to be spreading. Hector Sants, managing director of the Financial Services Authority, admitted the “dispersion of economic risk” meant it was “very difficult to be clear where all the economic risk is in the system”.

Yet it was not all downtrodden comments. Mr Moulton answered a question on tax by saying: “Instead of looking at it as giving us a generous tax system, you should perhaps look at it the other way: If you didn’t, you might stop getting so much tax.”