Friday 29 June 2007

Big votes against Tesco on pay and labour standards

Lots of fund mand games at Tescos AGM today. According to The Times and The Telegraph the company suffered a serious rebellion over exec pay arrangements, with about 1 in 6 investors failing to back a controversial incentive scheme. Truste me, in Uk corporate governance that is quite a big upset.

Even more notable though is that a shareholder resolution requisitioned by someone from War on Want achieved almost 10% votes in favour and even more abstentions. Here are the company's stats. I'll try and have a proper look over weekend.

How capitalism works... in the music business

Slightly off topic but I thought the news that music store Fopp might go into administration is worthy of a closer look (not least because Fopp is a really good place to get cheap CDs if you want to fill in your back catalogue, so it would be a shame to see it go under).

The news that Fopp may go into administration is blamed on -

the rise of supermarkets and online retailers selling CDs and DVDs, as well as the surging popularity of downloading music from the internet.

The strange thing is that it was only earlier this year that Fopp massively increased its number of stores. In February it bought 67 stores off rival chain Music Zone. Now this Manchester-based company had recently gone into administration, which was blamed on -

competition from online retailers and supermarkets.

Funnily enough, Music Zone itself had only recently gone through something of an expansion. In January 2006 it acquired 41 shops from the collapsed retailer MVC. You see MVC had gone into administrion just before Christmas, a moved which was blamed on -

tough competition from supermarkets, as well as increased music and film piracy.

And going one further step back down the chain, MVC itself acquired the stores from Woolworths back in August 2005. The other snippet in the first stage of the story worth noting is that a private equity firm had been sniffing around Woolies, but was put off by the music store bit off the business.

What's the moral? I'm not sure. Is it that lots of businesses can fail to spot a dying market? That the private equity mob really do know what they are doing? Or is it simply that online music has sounded the deathknell for most record shops and this is finally being played out? Given that my music purchases are now about ten to one online versus CDs (and even then mostly from Amazon) maybe it's just another example of the constant reinvention within markets.

Thursday 28 June 2007

Brown cabinet - Purnell moves onwards and upwards

Key appointments (for workers capital geeks) so far are:

Chancellor - Alistair Darling (I forget who the previous incumbent was...)
Treasury - Andy Burnham (replacing Stephen Timms)
Work & Pensions - Peter Hain (John Hutton)
DTI (or whatever it will be) - John Hutton (Alistair Darling)
Culture - bloggers' favourite James Purnell - another pensions minister moves on! (Tessa Jowell)

Presume we won't find out minister of state and other junior ministerial roles for a day or so.

Warren Buffett - the rich should pay more tax

Interesting bit in The Times here about billionaire US investor Warren Buffett arguing that the rich don't pay enough tax. Buffett is a paid-up member of the boss class (although a Democrat!) and one of the most respected investors in the world. He is just the latest in a number of remarkably un-radical (politically) people to warn that growing inequality could do a lot of damage.

As The Times says:

The comments are among the most signficant yet in a debate raging on both sides of the Atlantic about growing income inequality and how the super-wealthy are taxed.

Another Myners strike

Last week he stuck the boot into buyouts at the TUC trustee conference, now the Telegraph reports he is having a go at the taxation of carried interest:

One of Gordon Brown's favourite businessmen is calling for the money earned by private equity partners from the success of funds they manage to be taxed at 40pc rather than the current 10pc rate.

Paul Myners, who donated £12,700 of his own money to help Mr Brown become Labour leader, believes that carried interest payments are "income related to employment and should be taxed as such in this country at the appropriate marginal rate".

In a submission to the House of Commons Treasury Select Committee Inquiry into Private Equity delivered yesterday, the former chairman of Marks & Spencer argues that it is for general partners of private equity houses to challenge his conclusion on carried interest. This is their share of the profit - typically 20pc - generated through a private equity fund.

Currently, carried interest investments, if held for two years, are eligible for just 10pc capital gains tax under taper relief rules introduced by Mr Brown when he was Chancellor.

Mr Myners has chaired two Treasury reviews at the request of the former Chancellor, and his comments are one of the clearest indications yet that the status quo surrounding tax and private equity is unlikely to continue.

His comments on carried interest are complex, but he believes that "carried interest is a reward for employment and management performance rather than risk-taking and should, accordingly be treated as income in the same way that bonus payments to employees in most other industries are treated as income".

However, he does not believe that profits on partners' personal equity investments should attract 40pc tax.

Wednesday 27 June 2007

ISC guidance on voting disclosure

The Institutional Shareholders Committee - an umbrella grouping for the big investor trade bodies in the UK - has today issued its guidance on public disclosure of voting records (subject of the LAPFF report yesterday). See their webpage and this is the actual document.

Having been involved in this issue a great deal over the past few years I have to say I'm a bit disappointed by the ISC framework. It just about endorses public disclosure but doesn't really give guidance on the level of disclosure, or how often it should be updated. And given that the approach is basically "comply or explain" I suspect that many managers will continue to keep their voting records in the dark.

It will be interesting to see how the Government responds if fund managers don't play ball. You get the impression they really don't want to use their reserve power. But, if this document has the lack of impact I expect, the industry may actually force the Government to move.


A tale of two Telegraphs

Interesting that there are two radically different views expressed in the Telegraph today on the taxation of private equity. For once I find myself agreeing with Alan Sugar Mini-Me Jeff Randall. See his piece here. Just in case you haven't been convinced of the case for changing the taxation paid by private equity partners, Simon Heffer's piece here should convince you.

Ignore the fact that it trots out all the usual, and weakest, arguments for the status quo (we mustn't interfere with the wealth of these genius businessmen or they will take their ball home with them and, yea, we shall all suffer). My point is that that his political judgment is so bad that you can get a pretty good feel for the direction an issue is heading by finding out the position Simon Heffer is adopting and looking for the complete opposite point of view. Put simply, if Heffer is defending the tax regime then Buffini and crew can as good as kiss it goodbye.

Tuesday 26 June 2007

Local authority pension schemes criticise lack of fund manager transparency

Local Authority Pension Fund Forum analysis of the state of voting disclosure in the UK:

Fund managers continue to keep voting in the dark

Just nine of the UK’s leading fund managers publicly disclose comprehensive data on how they exercise their shareholder voting rights, with the majority of fund managers continuing to disclose no information at all, according to research by the Local Authority Pension Fund Forum (LAPFF).
As a result of its findings the Forum has recommended that the Institutional

Shareholders Committee clearly endorses full disclosure as best practice in its expected forthcoming guidance on the issue.

The Forum, whose members manage over £70bn in assets, reviewed the websites of 40 leading UK asset managers during May to assess the extent and nature of disclosure of shareholder voting records.

The key findings were:

• 15% (6) of the sample disclose full records.
• 22.5% (9) disclose reasonably comprehensive data.
• 40% (16) of the sample disclose some data.
• Data can be hard to locate on websites.
• A number of managers’ records are not regularly updated.
• At least one record contains an inaccurate or misleading disclosure on a high-profile voting issue.
• Overall disclosure by the market is limited.

The Forum also scored the disclosures made by each fund manager in terms of level of disclosure, ease of access, and the usefulness of the data provided. Just one manager – Co-operative Insurance Society – achieved a top score in all three areas, with Insight Investment and Standard Life also scoring highly. However, 60% (24) of the managers reviewed scored zero in all three areas.

The Institutional Shareholders Committee (ISC) is expected to issues guidance on voting disclosure shortly. Based on the findings from its research, the Forum has recommended that the ISC guidelines should set out:

• That full disclosure of voting records by company meeting is best practice.
• That voting records should be made easily accessible.
• That voting records should be updated at least quarterly.

Cllr Darrell Pulk, chair of the Forum, said: “Leaving it up to fund managers to decide how and what to disclose has resulted in a situation where just a handful provide meaningful data, whilst the majority disclose nothing at all. The current state of disclosure is patchy to say the least, which is unhelpful for trustees and beneficiaries who want to understand how managers address corporate governance issues. We urge the ISC to take the opportunity to send a clear message that full disclosure is best practice, and to encourage fund managers to take transparency seriously.”

A full copy of the LAPFF report, Proxy Voting Disclosure by UK Asset Managers, which includes individual manager ratings, is available on request.

Monday 25 June 2007

ITUC report on private equity and hedge funds

Plenty of new union reports coming out on the capital markets now! Here's the latest one from the ITUC. Press release below, you can download the report itself here.

World Trade Union Body Issues Global Warning to Pension Funds on Private Equity and Hedge Funds.

New ITUC Report Released Today Maps Regulatory Agenda

Brussels, 21 June 2007: Launching a new report “Where the house always wins, Private Equity, Hedge Funds and the new Casino Capitalism” the world’s peak trade union body, the 168 million-member International Trade Union Confederation (ITUC), today issued a global warning to pension funds over investment in private equity and hedge funds. At its biannual General Council meeting, top trade union leaders from around the world adopted a resolution calling on pension funds and other investors of workers’ capital to exercise caution over such investments until governments deal with a host of regulatory, transparency, taxation and sustainability issues.

Pension funds today provide more than 25% of private equity capital, but such highly leveraged investments are high-risk, don’t necessarily generate better long-term returns than other investments, and frequently have negative impacts on employment, wages and working conditions. Managers of private equity firms, some of whom receive tens or even hundreds of millions of dollars in income each year, are also in many cases paying tax at rates well below ordinary workers.

“The ITUC is advising pension trustees and managers to take extreme care with these casino funds. Contrary to the hype, they can bring substantial risks and in the long term many such funds have performed well below expectations. The real winners are the private equity and hedge fund managers – while investors, and workers employed by companies targeted for leveraged buy-outs, have no such guarantees. The retirement incomes of millions of workers are at stake, and the future for these funds is much less rosy than they would have us believe”, said ITUC General Secretary Guy Ryder.

While some funds have been prepared to negotiate agreements with the unions which cover workers employed by take-over targets, the large majority of buy-outs provide no protection for employment levels, wages and working conditions. In one of several cases highlighted in the report, the private equity owners of KB Toys who had invested just US$ 18.1 million of their own money, used a ‘dividend recap’ to pay themselves and several company executives some US$ 120 million. Shortly after, the company filed for bankruptcy protection and nearly one-third of its workers lost their jobs.

“With leveraged buy-outs reaching US$730 billion last year, the threat to short term stability and longer term sustainability in the global economy is real and cannot be ignored. It is just a matter of time until one of these massive transactions turns sour, and even a modest change in global economic conditions such as a significant rise in interest rates could lead to a cascade of collapsing deals, jeopardising hundreds of thousands of jobs worldwide. In addition to the dire consequences for workers, the macro-economic effects of this would be disastrous” said Ken Georgetti, Chair of the ITUC Workers’ Capital Committee and President of the Canadian Labour Congress. “The secretive nature of these funds should give us all concern”, he added.

With Denmark estimating that it stands to lose 25% of its corporate tax revenues due to private equity and hedge fund activity if it takes no action, countries around the world are facing dramatic falls in already declining company tax income, posing new threats to public services and social protection. The report describes how, due to aggressive tax-minimisation schemes, taxpayers are in effect subsidising the activities of hedge funds and private equity, and thus the incomes of some of the world’s richest people.

“Until regulators deal properly with the issues of transparency, regulation, taxation and protection for the victims of ‘buy it, flip it, strip it’ behaviour, pension funds should remain on high alert over unsustainable investments and avoid committing workers’ retirement incomes to them, especially where private equity and hedge fund managers refuse to negotiate with unions and agree on protection for the employees of companies which are being bought-out. There are funds which have reached agreements with trade unions, and others should follow this positive example”, concluded Ryder.

Noting that any voluntary measures adopted by private equity and hedge funds are unlikely to solve the problem, the new ITUC report sets out a series of detailed recommendations for regulation of them:

Transparency; including reporting of assets by private equity, a harmonised international framework to cover hedge fund activities and reporting requirements for companies taken off stock markets into private hands;

Financial stability and risk; including limits on the levels of ‘leverage’ in transactions to reduce the risk of bankruptcy, increased oversight on private equity, and enhanced monitoring of the use of ‘derivatives’ by hedge funds;

Taxation; including limits on tax deductions for interest payments, removing the ‘carried interest’ tax loophole for fund managers, changes to rules concerning tax ‘offshoring’ and increased capital gains tax on short-term arbitrage deals;

Measures to protect public services and utilities from the possible negative effects of leveraged buy-outs;

Corporate governance; including stronger measures to prevent conflicts of interest and employee- and investor-safeguards, reform of voting rights in listed companies, and limitations on withdrawal of liquid assets, capital maintenance provisions, and requirements to report on the social impact of transactions; and,

Workers’ rights; including information and consultation provisions, rules concerning continuity of employment entitlements when companies are sold, and enhanced frameworks to protect workers’ rights and promote social dialogue to restrain the ruthless cost-cutting typical of leveraged buy-outs.

Fund managers fight back on voting disclosure

The IMA, the trade body for fund managers, has had a pop at the TUC over the issue of voting disclosure. They did the same thing last year. There's quite a bit of spin here. Yes the number of fund managers disclosing some information publicly about how they vote has gone up but a) several of these just disclose headline stats and b) most disclose nothing at all.

News story from Thomson Investment Managemet News:

War of words breaks out between the IMA and TUC over manager voting

The investment management body has accused the TUC of 'promoting myths' in its latest annual fund manager survey.

LONDON (Thomson IM) - A war of words has broken out between the TUC and the IMA, with the latter accusing the TUC of "promoting myths" in its latest annual fund manager survey.

The TUC today said that the response for its fifth annual fund manager voting survey has been "disappointing", with just 45 pct of the target group providing some sort of information, compared with 61 pct last year.

However, Richard Saunders, chief executive of the Investment Management Association, said: "The TUC are promoting myths."

"The fact is that investment managers have become steadily more transparent over the last four years. Disclosure to clients is universal, and public disclosure is continuing to increase. The voluntary approach is working."

He added: "Our own annual survey into fund managers engagement, due to be published shortly, shows that, in 2006, 16 fund managers holding over 340 bln stg worth of shares in UK companies made details of how they voted public by putting them on their website - an increase of over 100 pct from two years ago."

Unveiling its fund manager voting survey earlier today, the TUC said this is the second consecutive year that the response rate has fallen, and the organisation stated that the results were somewhat surprising, given that it is the first survey to take place since the Companies Act gave the government reserve powers to force investors to reveal how they vote their shares.

Kay Carberry, assistant general secretary at the TUC, today told pension trustees that the case for the government to use these reserve powers would be "overwhelming", if fund managers continue to fail to provide information on how they vote.

The TUC said it will now lobby the government to use its reserve powers and introduce mandatory disclosure of voting records, in the absence of a significant increase in disclosure from fund managers.

The survey found that, while last year 34 investment organisations provided full or partial responses with 19 not responding, this year it received full or partial responses from only 25 organisations, with 30 failing to respond.

The response rate has been consistently falling - it was just 45 pct this year compared to 61 pct last year and 68 pct in 2005.

Six of the responses were a direct result of pressure from trustees who are members of the TUC's member nominated trustee network, it said.

"Looking ahead, it will be interesting to see whether - in the light of increasing awareness of corporate governance and the potential for pension fund representatives to influence corporate behaviour, more pension funds retain voting rights in the future, rather than relying on investment institutions to exercise rights on their behalf," the TUC said.

Sunday 24 June 2007

Pension funds to take a tougher line over private equity fees

A new front opens up in the private equity scrap. Now the NAPF, trade body for employers running pension schemes, is looking into the fees that the industry charges pension schemes, which are the source of an increasingly large chunk of the money fueling buyouts. See this bit in The Observer.

I suspect this is actual quite a fertile area. From what I have read, even private equity practitioners are surprised that investors don't club together to try and put pressure on fee levels.

Tories u-turn over private equity

More clueless policy on the hoof from the Tories, this time in relation to private equity. They are not alone in being surprised by how the rise private equity has blown up to be be a major political an economic issue. As always however, the Tories initial instincts are anti-union and mindlessly pro-status quo. As I mentioned at the time, George Osborne foolishly gave a very slavish speech to the BVCA back in March where he gave the clear message that the industry needed to be a bit more transparent but basically everything else was hunk dory. He specifically referred to the tax treatment the industry receives, arguing that promoting more venture capital (as opposed to buyout activity) would make it more acceptable:

"The third response to the attacks you face is to do more to promote proper venture capital. Remember, the tax treatment that you work under was introduced to boost real venture capital. So the best response you can make to criticism of that tax treatment is to ask again: why does Britain have such poor venture capital funding, compared to the United States?"

"That has got to change. Don't just be a private equity industry - be a venture capital industry too. More transparency. Real social responsibility. Proper venture capital."

"Meet your side of the bargain and I will meet mine."

Now The Observer confirms reports from last week that Osborne is planning to review the tax treatment that applies to private equity.

Saturday 23 June 2007

Fund managers get more secretive says TUC

It's that time of the year when the TUC publishes its annual survey of how fund managers vote at company AGMs. There's a bit of a drop in the response rate this year. Not a particularly canny move by fund managers if they want to avoid being forced by the Government to disclose voting records (by doing it voluntarily in their own way).

Anyway here's the release:

Fund managers get more secretive over voting record, says TUC

For the second year running the number of fund managers disclosing their voting record at company AGMs to the annual TUC survey has fallen - this time to less than half - prompting the TUC to call on the government to activate legislation already on the statute book to force fund managers to disclose how they vote.

This year 25 out of the 55 organisations surveyed (45 per cent) responded in full or in part to the TUC's fifth annual survey. This is a fall from 61 per cent last year and 68 per cent in 2005.

The survey is available at and the results will be added to the TUC's searchable database of fund manager voting at later this month.

The results have been published to coincide with the TUC's annual conference for pension fund trustees today (Friday 22 June). Speakers at the conference include TUC Assistant General Secretary Kay Carberry, Minister for State Pensions Reform James Purnell MP, CWU Deputy General Secretary Jeannie Drake and Cass Business School Dean, Richard Gillingwater.

TUC General Secretary Brendan Barber said: 'When government was talking of legislation, fund managers were much more ready to publish their voting record and tell us that a change in the law was not needed. Now that they seem to have judged that the threat has gone away, more than half of fund managers have decided to go back to ticking the secrecy box.

'Yet the government already has the power in the 2006 Companies Act to introduce regulations to force disclosure. It is a relatively easy task for ministers to activate these clauses. It now looks like they will have to.

'It is hard to see the objection to disclosure. The bulk of the votes come from the investments of millions of ordinary employees in their pension fund. All we are saying is that people should be able to find out how the votes that go with their savings are being cast. Many fund managers clearly agree, and deserve credit for co-operating with our survey.'

Fund managers that responded were Co-operative Insurance Society; Fidelity International; Friends Provident/ F&C Investments; Glasgow Investment Managers; Halbis Capital Management (HSBC); Henderson Global Investors; Hermes Pension Management; Insight Investment Management; JP Morgan Fleming Asset Management; Lazard Asset Management; Newton Investment Management; RCM; Schroder Investment Management; and Standard Life Investments.

In addition, the following organisations responded to Section One on voting and engagement records: Axa Rosenburg; GMO UK; Legal and General; Marvin and Palmer Associates; New Smith Asset Management; Origin Asset Management; PIRC; and State Street Global Advisors.

Thursday 21 June 2007

Behavioural finance links

Thought it might be useful to post up some links for anyone who shares my geeky interest in behavioural finance and related stuff.

There is an excellent site with loads of links to academic papers here. You might need to install a new font to read some of it, although so far I have found you can read most of it without doing so. Just try clicking on a few links and you'll see what I mean.

There is another great directory type site here.

There is quite a bit of stuff on Wikipedia.

The Journal of Behavioural Finance site is here.

Robert Shiller homepage.
Andrei Shleifer homepage.

The Fooled By Randomness site is here.

Think that's enough for starters.

Select committee round 2 - no-score draw?

Reading the reports of yesterday's second round of select committee evidence from the private equity industry, I get the impression that the heads of the big buyout firms did an OK job of defending themselves. They certainly didn't suffer the same kind of implosion as the BVCA vanguard did last week. The coverage in today's FT is worth a read, also this bit in the Telegraph about the Treasury's own evidence to the committee. I think the report is overblown, but it's interesting to see that HMT might think there's a problem with incentives that misalign the interests of general partners (the buyout mob) and limited partners (the pension funds and others committing capital).

As an aside, I see that FT reports that Sion "idiot" Simon yet again decided to direct his fire at the unions, accusing them of indulging in "class politics". Its true that there has been some knockabout campaigning from the unions, but let's be honest, if that hadn't happened we probably wouldn't be having the policy debate about private equity at all. Perhaps he should make another "hilarious" spoof video to get his message across. Or at least get his hair cut.

Finally, there's an interesting slip at the end of the Telegraph's comment piece today.

If the price to pay for a dynamic wealth and job-creating economy is a handful of clever people enjoying the riches of Croesus, on balance it's one worth paying.

People often use the phrase "the riches of Croesus" to describe the super-wealthy, but the story on which the phrase is based has a rather different ending. Croesus ending up losing his kingdom, and was nearly executed. He was only saved because, as he was about to be burnt alive, he basically acknowledged the fickleness of good fortune and wealth (I'm simplifying a bit here!). The story has been used as a warning against hubris, and assuming your good fortune will last. Here's the Wiki version.

(I should point at this stage that I only know this because the story is recounted - as a warning against assuming wealthy people know what they are doing - in the rather excellent book Fooled By Randomness that I'm currently reading.)

Actually, thinking about it, maybe the Telegraph description is more apt than I realised.

Wednesday 20 June 2007

PS - hedge funds

The GMB is clearly on a roll as a result of its campaigning on private equity. It's now also having a pop at that other controversial asset class - hedge funds. The bit below is from the FT, full article here. Would be good if the GMB follows Unison's lead and commits some resource to workers' capital activity.

Hedge fund working group is just 'window dressing'
By James Mackintosh in London and Bertrand Benoit in Berlin

Published: June 20 2007 03:00 | Last updated: June 20 2007 03:00

A hedge fund working group set up to examine voluntary standards for the industry was dismissed as "window dressing" yesterday by the head of the GMB union, which has led the campaign against the private equity industry.

Paul Kenny, general secretary of the GMB, said the government should probe the sector, not leave it to set its own standards.

But the creation of the working group - to be run by Sir Andrew Large, former deputy governor of the Bank of England - was welcomed by Germany and the European Central Bank, both of which have been pushing for greater hedge fund transparency.

Peer Steinbr├╝ck, German finance minister, claimed credit for the move, saying: "Without the process started by us, we would possibly have not had such a step at this time."

The ECB said it was "in line with the approach proposed" by its president, Jean-Claude Trichet.

Mr Kenny, who appears in front of the Treasury select committee today, has emerged as the head of a coalition of unions and politicians pushing for a clampdown on private equity, after a series of job losses following leveraged buy-outs.

He has also been critical of the role of hedge funds in pushing for the break-up or sale of groups. Yesterday Mr Kenny told the FT that voluntary standards for hedge funds were "window dressing of little value".

"It is inevitable that government will have to look at the long-term impact that hedge funds have on the economy," he said. "Maybe it is time to get the clippers out to prune the hedge funds."

Unison steps up capital stewardship work

Just received the release below from a mate at Unison. Also worth checking out this conference debate about investments in arms companies. I personally think divestment from "unethical" industries is a bit of a dead end unless you have a clear mandate from your beneficiaries (ie it clearly makes sense for the pension fund of a cancer charity not to invest in tobacco companies). It makes it easier for opponents of responsible investment to pigeonhole you as a) politically-motivated and b) uninterested in funding pensions. But it's good to see that the issues are at least being debated.

Anyway, here's the release:



Britain’s largest public sector union, UNISON, is calling on workers to serve as trustees on occupational pension schemes and has become the first in the country to set up such an extensive training scheme for shareholder activism, it was announced today at its National Conference in Brighton.

UNISON General Secretary Dave Prentis said:

“Through their occupational pension schemes and savings, citizens are now collectively the majority owners of most large companies. If people want a real say on how companies conduct themselves, then they should consider becoming trustees on pension boards, who ultimately decide where to invest.

“Concerns over corporate behaviour and asset stripping by private equity groups are strong arguments for greater shareholder scrutiny and empowerment. There is also strong evidence to suggest that the more representative fund boards are, the better they perform.”

By October this year, pension scheme boards are required to have one-third of seats allocated to member-nominated trustees, increasing to half by 2009.

UNISON has launched a web-based community and training programme to provide support for its first wave of Member Nominated Representatives (MNR) and started the ‘capital stewardship’ campaign to sign up pension scheme members to become MNR trustees.

UNISON is also committed to co-ordinate with other active investor bodies over issues of mutual or ethical concerns, such as arms trading, climate change, and excessive board remuneration that might diminish company financial stability. Knowledgeable UNISON members could also benefit investor boards by plugging a deficit of expertise in workforce issues and laws.

Further information: Press Officer Richard Bingley on 01273 732057 or 07957 505675

Private equity showdown

Lots of PE-related new today as the heads of the big buyout firms face the select committee. I'm not a big fan of the Indie, but they have actually put a tub-thumping piece on private equity and tax on their front page under the rather ace headline "Tax and the City".

Plenty of stuff in the FT. Of particular note are this bit on the British Chambers of Commerce moaning that the storm around buyouts is creating a bad image for business generally. I totally agree, which is why I am surprised the CBI wants to try and fight the corner for buyouts. The other bit worth reading is Andrew Hill's Lombard column which presents a rather cynical, but probably accurate, view of what today's fund and games really represent. (One thing does annoy about this piece, and that is the (now obligatory) reference to how PE helps fund pensions. Yes, this is true, but the PE weighting in a typical schemes's portfolio is under 3%, so public equity still provides the lion's share. Plus most schemes have no weighting. Plus any asset class that is generating returns helps fund pensions. We don't feel obliged to genuflect towards the Government for providing a returns on bonds do we? Why is PE so special in this regard?)

Anyway..... meanwhile on the pensions issue a Lib Dem MP has called for an inquiry into trustees' powers when sponsoring companies are taken over by buyout funds. See this bit from the Professional Pensions site. Definitely an issue worth keeping an eye on. The buyout mob really need to be seen to be playing fair in terms of pensions obligations or they may face further intervention. So trustees can gain leverage by going public about any concerns.

Finally, the GMB campaign on private equity shows no sign of letting up. They are organising a vote on the leading private equity rogue down at Glastonbury.

Petition for a ballot on NUJ Israel boycott

As an ex-NUJ member (GMB these days) I can't sign this petition, but I still think it deserves a plug, and I'm forwarding it to journo mates who are members.

You can find the petition at the address below. Some big names on it already.

Tuesday 19 June 2007

Boots trustees reach agreement with KKR

Sounds like the Boots trustees have done a good job. The ammounts mentioned are much higher than those that were originally mentioned, although KKR undoubtedly pitched low initally (as the trustees pitched high) as a negotiating tactic.

From the Beeb website:

Deal reached over Boots pension

Kohlberg Kravis Roberts (KKR), the private equity firm buying Alliance Boots, has reached a deal with the chemist group's pension fund trustees.

Under the agreement, KKR will pay £418m over 10 years to plug the shortfall in the scheme, and put aside a further £600m as a potential safety net.

The deal comes a day after the European Commission cleared KKR's £11.1bn takeover of Alliance Boots.

The pension fund trustees had earlier criticised KKR for not talking to them.

When KKR's takeover was first announced at the end of last month, the trustees said the private equity firm should have first reached a deal on future pension provision.

Some reports even said the trustees were planning High Court legal action to block KKR's deal if an agreement could not be reached, although this was never confirmed.

'Positive result'

"We are pleased to have reached a satisfactory agreement on the future funding and security of the Boots pension scheme," said John Watson, chairman of the pension trustees.

"All of our members will benefit from the agreement and I am delighted that this period of uncertainty has come to an end with this positive result."

The takeover of Alliance Boots is now set to be completed in July.

It will be the first time that a FTSE 100 firm will be delisted and taken private.

KKR first approached the Boots board in March.

The Alliance Boots pension has 66,000 members, including 16,000 employees who are still making contributions.

Monday 18 June 2007

Trustees and transactions

More evidence of trustees asserting themselves more in the M&A market. Today's FT reports on the trustees of the ICI pension scheme (coincidentally one of the first big DB schemes to close to new members, even before the TMT-inspired market blow-out) insisting on a central role in ICI talks with Akzo Nobel.

Here's an excerpt from the FT article -

A spokesman for ICI’s pension trustees said: “We would have expected to have an early and direct conversation with anyone wanting to replace ICI as owner of the company.”

He highlighted the power of the trustees to determine the size of the deficit, which could range from £500m up to £2.2bn, depending on their view of a bidders’ financial strength and their confidence in the bidders’ willingness to fund long-term promises to pensioners.

The scheme’s liabilities are more than £9.2bn, against a market capitalisation of £6.5bn, according to the company.

He said: “If faced with someone who hasn’t talked with us, we would have to form a different, harsher view [of the owner]. That would be another factor in determining the size of the deficit.

“We are agnostic about who owns ICI, but not about the strength of the promise.

“If we perceive the promise [of whoever sponsors the pension scheme] is legally and financially weaker, that would increase the size of the deficit. It would be better to have an up-front conversation.”

Separately it looks like the trustees of the Boots pension fund have finally got KKR to play ball. This bit from The Observer yesterday.

TUC launches online shareholder voting database

TUC press note -

How fund managers vote... at a glance

Savers and pension fund managers can now find out how the fund managers who look after their savings are casting their votes in controversial decisions at company AGMs, thanks to Open Vote, a new searchable database available on the TUC website (at

The TUC has fought a long campaign to get fund managers to publish their voting records. The TUC first asked managers in an annual survey how they cast their votes in 2002. After initial widespread resistance, other than from a few progressive managers, response rates rose to more than half in 2005 but dropped back again last year.

The online database has been launched in the run up to the TUC’s annual conference for pension fund trustees on Friday (22 June). Speakers at the conference include TUC Assistant General Secretary Kay Carberry, Minister for State Pensions Reform, James Purnell MP, CWU Deputy General Secretary Jeannie Drake and Cass Business School Dean, Richard Gillingwater. Workshops will include DWP Deregulatory review, Past deficits, Personal accounts and existing schemes, Private equity, Pension protection funds and Shareholder voting.

The results of the most recent survey of fund managers will be published at the conference. Users of the database can look at how all managers voted on a particular issue, or follow the voting record of particular funds managers.

TUC General Secretary Brendan Barber said: “Fund managers are entitled to use the votes that go with the shares they hold, but they should never forget that the ultimate owners are the millions of pension fund and other investment fund members. They have a right to know how their ownership rights are being exercised.

“Yet astonishingly some fund managers still refuse to be open and transparent about their voting record. Ministers hoped that those fund managers who pioneered transparency and disclosure would be followed by the more reluctant, but early signs from this year’s survey suggests that this is likely to be a vain hope.

“With the pressure mounting on private equity to disclose more, fund managers should recognise the writing on the wall and ministers must recognise that appeals for good behaviour are not working. Trustees should demand full disclosure from their fund managers.”

Thursday 14 June 2007

ABI win concession on Personal Accounts

The Government has yielded to pressure from the insurance industry and reduced the cap on contributions to the incoming Personal Accounts system to £3,600 a year. The announcement is part of the Government response to the consultation on the system, which the DWP has published today.

The TUC press note is pretty positive. It's important to keep a positive consensus together around Personal Accounts. There is some sniping going on from the insurers, even using some of the consumer groups' arguments to have a go, as in this case.

Private equity's first casualties

After the mauling the BVCA got at the select committee evidence session this week, it's no surprise to see that head of the organisation has been drop-kicked. Officially he has stood down, but there are few doubts that he was given a major shove, rather than jumping himself. As the Torygraph opines, this is a bad time for the trade body to lose its leader.

Notably the CBI is now sniffing around the buyout firms. Undoubtedly the CBI could do a much better job of lobbying on behalf of the industry (it would be pretty hard to do a worse job). But I wonder if it is really a sensible move on the part of the CBI. The unions have successfully created a popular image of private equity as super-rich robber barons, does the CBI really want to be associating itself with that?

Casualty number two is the tax treatment of carried interest. Any hopes on the part of PE professionals that this would be left untouched must surely be dashed now that Sir Ronald Cohen has argued the case reform. Cohen is the (politically) acceptable face of the industry, and a friend of the Government. If he is talking this language the writing is surely on the wall. See the FT report.

Wednesday 13 June 2007

Private equity takes a pounding

Has the wind finally shifted in the debate about buyout activity? It certainly looks like it. Yesterday a range of groups (including the TUC) were giving evidence to the Treasury select committee about private equity. From the press reports it sounds like the BVCA got a real shoeing.

Reports in the Grauniad, Indie, Times and Torygraph all tell the same story. Reading the runes, I wouldn't want to bet against changes to the way that carried interest is taxed. The industry might bleat that their stars will move elsewhere, but I suspect that the patience of regulators around the globe at the PE industry's "and we're talking our ball with us" attitude is wearing thin.

Plug Alert!

Thanks to Naomi for providing me with the direct link to the GMB's stuff on insolvent pension funds at PE-backed companies. Here it is -

Tuesday 12 June 2007

Wrong thinking on directors' pay

I came across this piece in the Telegraph whilst I was on holiday. I can't think of a bit of commentary recently that I have disagreed with so much (apart from the Indie editor's response to Blair's speech on the media today!).

Here's the first bit I don't like -

The shock is that Richard Lapthorne, chairman, and his management team, have doubled the value of the company over the past 12 months, adding £2bn to the value of the pension funds which own it.

He is ascribing increase in share prices to management competence. The more I learn about the stockmarket, the less I am willing to believe that share prices are anything more than a consensus of ignorance. I am wary of attributing movements in the price to anything more than trading activity, so I do not believe you can stand up the claim that the C&W management have created money for pension funds. the shares have gone up - that is all.

Second gripe -

If someone had called me this time last year (never mind in the dark days before that), and said C&W could consistently be in the top three of the world's telecoms businesses I would have hung up assuming they had got their lines crossed.

Another insight I have gleaned from my geeky interest in behavioural economics is our poor ability at interpreting stastistics. A good example of this is reaction to failures. If a football team gets walloped 5-0 in one game, and the manager makes changes to the team and next time they win 1-0 he might be hailed as a turnaround expert. But in reality it could just be the randomness of the data. After a heavy defeat (or an extreme event if you prefer) the probability is that the next result will be less 'extreme'. It is likely to be so regardless of what activity is undertaken.

However because of our desire to see causality when it is isn't there, will likely attribute a modest victory following a major defeat to tactical nous (unless we are talking about Steve McClaren). There is no reason why this should not apply to businesses. Unless you believe that C&W was a basket-case, it was likely to turn the corner after a dodgy period, that's just the randomness of reality.

Gripe 3 -

The shock is that management, notably John Pluthero who runs C&W's UK business, have already got so close to reaching all their targets that a £20m cap on how much he can receive, has been removed. It's easy with hindsight to say that those targets must have been too soft when agreed last year. Well actually no, they weren't soft, and no one said they were.

Wow, so the company looks liek hitting targets that it set itself. And how can we say whether the targets were "soft" or not except with hindsight? I'm also presuming that his "no-one" here is a reference to analysts, who are not celebrated for their ability to predict the future. Directors themselves will tell you that they manage down analysts' expectations in order to ensure they can hit targets.

Gripe 4 -

What's shocking is that more companies don't align management and shareholders' interests more closely and that shareholder groups, such as the Association of British Insurers, don't insist on it.

Eh? Quite clearly the big shareholders have spent a lot of time trying to do precisely this over the past few years. Has he slept through that? Either that or the "point" is that shareholders aren't suggesting packages like the C&W one often enough, In other words we aren't paying our directors enough money.

Gripe 5 -

At least C&W's biggest shareholder, Standard Life, has come out in support of the plan. More should follow.

I will resist questioning Standard Life's motives on this one, as corp gov people I have met there have always struck me as very straight. However the support of one institution proves nothing.

And finally - where in all of this is any recognition that the success of C&W recently is the result of the efforts of anyone below board level?

Monday 11 June 2007

Investment charlatans

Interesting bit on the back of FTFM today -

Get real on investment charlatans
By Jonathan Davis

Published: June 11 2007 12:12 | Last updated: June 11 2007 12:12

Can the business of investment really be dominated by charlatans? In a provocative new book, entitled Black Swan, Nassim Nicholas Taleb says, in as many words, that the answer is Yes.

The arguments he advances in support of this claim are, it may pain some readers of these pages to hear, remarkably convincing. In fact many of his arguments are beyond rebuttal.

Forget for a moment, however, the pejorative connotations that the word “charlatan” has in common speech.

Mr Taleb, who made a name for himself with an earlier book, Fooled by Randomness, in which he castigated human beings’ capacity to see meaningful patterns in random data or events, is no stranger to self-regard.

You have only to read a few pages of his latest book to discover the pleasure he takes in the rage that his ideas are prone to incite in others, notably self-important Nobel Prize winners in economics.

Yet such ad hominem weaknesses should not detract from the force of his arguments. If you define a charlatan as someone who promises (and is paid for) results that he or she knows cannot in reality be delivered, the allegation need not reflect poorly on the integrity of the professional involved. It is perfectly possible to go about your business with the best of intentions and the loftiest of motives, while continuing to be a pedlar of false promises, simply because your job is undoable.

Economic forecasters, for example, are in this position much of the time. They make forecasts not because they know, but because they are asked. So what, if they are likely to be providing an illusory comfort blanket to investors and businessmen? Fulfilling a demand for bogus precision about an unknowable future is a service of sorts, even if the results rarely stand up to intensive scrutiny – which, interestingly, they rarely are given.

The reason that Mr Taleb’s new book should be required reading for all would-be investment professionals is not because of his scorn for self-righteous seers of all types, entertaining though his many asides can be. (“Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom and the ability to shallowly perform on harrowing schedules. Add to this task the duty of attending opera performances!”)

The real reason for saying Black Swan is a powerful antidote to most received wisdom on investment is that its subject is a fundamental issue that confronts anyone involved in financial decision-making, namely how to confront the limitations of knowledge and the human mind in processing and acting on unreliable information in conditions of complex and persistent uncertainty.

Mr Taleb’s biggest bugbear is the academic community, with its attempts to impose models on financial markets that are built on entirely false and unrealistic premises, such as that returns in the financial world are normally distributed. Even though this is patently not the case, models built on probability theory, what Mr Taleb calls “the ludic fallacy”, the idea that markets follow the same rules as a game of dice, are still the basis of most finance theory that is taught in business schools.

The black swan of his title is an unexpected “fat tail” event of the kind that emerged to confound Long Term Capital Management and Amaranth, among others. In the latter case, he notes drily, only days before its demise the fund had written to its investors urging them to take comfort from the fact that the firm now had 12 “risk managers” in place. (In the same spirit he quotes a letter from the captain of the Titanic, boasting that he never expected to be involved in a dangerous incident at sea.)

Mr Taleb’s point is that the most important events in the financial world, the ones with the greatest consequences, are almost always “fat tail” events that are not and often cannot be predicted.

If 9/11 had been foreseen, it would surely have been prevented. These trend-breaking occurrences are the ones for which investors must be prepared, even if they cannot hope to predict them.

In Pasteur’s words, “luck favours the prepared”. Those who think that regressions and correlations based on past data are a guide to the future, however perfect the fit, are guilty of wishful thinking. Being able to live with rare events that nevertheless have seismic consequences is uncomfortable, but it is the mark of the true risk manager in finance.

Yet by a strange irony, notes Mr Taleb, those who think of themselves as conservative financiers are often the most blind to risk, such as the senior bankers who saw the entire cumulative earnings of the banking system to that point wiped out in the international debt crisis of the early 1980s.

The literature of scientific discovery and behavioural finance, on which Mr Taleb draws freely, helps to explain why in practice human beings prefer to impose comforting retrospective order on events that in reality are more random and non-sequential than the mind likes to pretend.

It is hard to think of any subject that is more relevant to fund managers and stockbrokers, who work in a business where reality and marketing perceptions are often widely divergent.

The fundamental pitch that both trades make for some kind of forecasting ability is demonstrably false, certainly at an aggregate level and often in individual cases as well.

It is small wonder if cognitive dissonance is commonplace among those who make their living by pretending that they have some superior insight into the future, while daily confronting the reality that in practice their understanding of risk is partial at best.

Private equity round-up

Plenty of news on the PE front while I have been away on holiday. I even managed to catch up on some Telegraph coverage whilst on the beach. Here are a few snippets...

GMB report on private equity and pensions

Interesting report looking at the correlation between private equity ownership of companies and insolvent pensiobn schemes.

Government looks at tax treatment of PE earnings

Apparently they are going to review the taxation of carried interest. I'm surprised this has happened, but it's a good news. Seem to have been given weight by this bloke from the industry.

FSA update
A follow-up on the previous FSA report.

Friday 1 June 2007

Wal-Mart is "too PC"

Well, it is Friday. Just a glimpse of shareholder democracy US-style, this American outfit has been targeting Wal-Mart for "turning to the Left" (chuckle). Their main bloke spoke at the company's AGM today -

NLPC to Criticize Faltering Wal-Mart Share Price at Company’s Annual Meeting; Ethics Group Says Attempt at Political Correctness is Distraction for Management

Date: May 31, 2007
Contact: Peter Flaherty 703-864-7902 or John Carlisle 703-798-0655

Falls Church, VA- The National Legal and Policy Center (NLPC) today released excerpts of remarks NLPC President Peter Flaherty plans to deliver at the Wal-Mart (WMT) annual meeting taking place on Friday, June 1 at the Bud Walton Arena in Fayetteville, Arkansas. NLPC is the sponsor of a shareholder proposal asking for the company to disclose its charitable giving to controversial causes.

From Flaherty’s statement:

In the year 2000, Wal-Mart stock was at $60. Today it is $47. In 2000, Target stock was at $34. Today it is at $60.

Instead of focusing on the share price, Wal-Mart management is too busy trying to appease critics funded by corrupt unions.

Go outside and look at the price of gas. It is over $3 per gallon. Thank environmental extremists who have prevented refineries from being built. They openly say that gas should be much more expensive, say $5 or $6 a gallon. Yet our CEO has embraced environmental alarmism. If Wal-Mart customers spend all their money on gas, how will they have any left to spend inside the store?

Our CEO invited Al Gore to Bentonville to talk about global warming. If Al Gore gets his way on carbon emissions, there is no way our economy can grow. How is this good for Wal-Mart?

Jesse Jackson slanders this company. The company’s response? Put Jesse Jackson’s crony on the board of directors. Did that shut up Jackson? No, not at all.

People shop at Wal-Mart because of low prices, not because the company is politically correct.

In December, NLPC released a special report titled Wal-Mart Embraces Controversial Causes: Bid to Appease Liberal Interest Groups Will Likely Fail, Hurt Business. The 11,000-word report is authored by John Carlisle and may be downloaded in pdf format at

NLPC promotes ethics in public life, and sponsors the Corporate Integrity Project.

Boots trustee attacks board

Interesting report on the Thomson investment managemet news site. This site is (currently) free to register so worth checking out.

Alliance Boots board takes flak from pension scheme chairman over KKR deal

LONDON (Thomson IM) - The board of Alliance Boots PLC came under attack today from the chairman of the health and beauty group's pension scheme, John Watson, for recommending an 11 bln stg offer from US private equity firm Kohlberg Kravis Roberts (KKR) and executive deputy chairman Stefano Pessina without ensuring the scheme's future planning and funding.

At the Court Meeting and Extraordinary General Meeting, convened to rubber stamp the 1,139 pence agreed offer, Alliance Boots' chairman Sir Nigel Rudd also drew flak from small shareholders opposed to the deal.

Their opposition was, however, in vain as the deal was overwhelmingly backed by investors.

Acceptance of the offer means Alliance Boots shares will de-list on June 28 -- the group becoming the first FTSE 100 company to fall into private equity hands -- less than a year after it was created through the merger of Boots Group PLC and Alliance UniChem PLC.

Watson, chairman of the Boots Pension Scheme since 1998, said he was 'disappointed' the board had backed KKR/Pessina's offer before agreement had been reached on how to fund the scheme's current deficit of 305 mln stg.

'I take no pleasure in coming to this meeting and asking a question,' he said, reiterating the trustees view that a new private owner taking on 8.2 bln stg of debt has 'serious implications' for the position of the scheme.

He said that, although meetings with KKR/Pessina were proceeding, no satisfactory agreement has yet been made.

'What will you (the board) do to influence ... to give the scheme the support it deserves,' he asked Rudd.

The chairman responded by saying he had been assured by KKR/Pessina that the Boots scheme will continue to be one of the best funded in the sector.

'You have my assurance that over the next two or three weeks I will be pressing for a resolution,' he said.

A spokesman for KKR/Pessina confirmed that talks with the trustees are continuing. 'We'd like to think that both parties are working to a constructive conclusion,' he said.

He declined to comment further. However, industry sources suggested the gap between what the trustees want and what KKR/Pessina are prepared to give is not huge -- tens of millions of pounds rather than hundreds of millions of pounds.

UPDATE - There is a piece about this in today's FT too -

The Kohlberg Kravis Roberts-led takeover of Alliance Boots looks poised to become a key test of the Pensions Regulator’s powers to protect company schemes after the buy-out was backed by shareholders but without any agreement on filling the fund’s deficit.

At a thinly-attended shareholder meeting on Thursday, John Watson, chairman of the board of trustees of the Alliance Boots pension scheme, said it and the consortium had not yet reached agreement on additional funding.

Mr Watson said the trustees “have made it clear that the borrowings in excess of £8bn being taken on to finance this acquisition have serious implications for the scheme”.

He said: “We have still not reached a satisfactory agreement, which inevitably gives trustees serious worries about the future.”

One pensions lawyer said the dispute was “shaping up to be the showdown at the OK Corral”.

Pensions lawyers believe that KKR, which has not yet received “clearance” for its transaction from the pensions watchdog, will challenge the latter’s ability to insist trustees negotiate up-front payments from employers to fund deficits.

The rules only apply to transactions that are structured to avoid paying pension liabilities.

The regulator recently issued guidance urging trustees to seek clearance – a procedure that absolves them of personal liability in the event the employer later becomes insolvent – when corporate transactions pile on heavy new debts.

However, lawyers said the regulator’s ability to do so, while enshrined in the general spirit of the Pensions Act of 2004, was not specifically written into it.