Bank's warning on asset stripping

BANK of Scotland chose a high-powered European venture capital investors' forum in Switzerland to issue a warning to the private equity industry - under heavy fire over claims many operators are no more than asset strippers - that it is time to get its house in order.

Ian Shanks, the bank's director of fund investments, who controls 2bn of Euro-wide private equity business, was one of a small number of Scots at the Geneva event along with Ross Marshall, chief executive of Dunedin Capital Partners, a mid-market equity finance specialist concentrating on 10m to 75m buyout deals.

Among others represented were Apax Partners and Kohlberg Kravis Roberts, the US outfit that has made a 9.7bn preliminary approach for Alliance Boots. The offer was the talk of the coffee houses and bars surrounding the European Private Equity and Venture Capital Association (EVCA) Investors' Forum, which attracted 200 institutional and fund-of-funds participants from more than 30 countries.

The UK Treasury has threatened to review the sector's tax benefits and the levels of debt involved in deals. This comes on the back of a Select Committee inquiry examining claims of lack of accountability.

With all of this in mind, Shanks fired his warning. "Those involved need to be very careful about how they handle their public relations," he said.

"The M&A market is very successful, but the private equity profile generally has increased and it's now a case of being seen to be operating properly," added Shanks, who heads a team of 50 managers investing in 100 funds.

Marshall admitted the industry in which he works "has got a lot bigger" in recent years. But he remained relaxed about private equity wheeling and dealing and ongoing investigations into methods employed.

"I think we need a bit of perspective, as there is a lot of ill-informed talk that all we do is buy a business, get it laden with debt and then asset strip before moving on.

"Yes, of course we use debt. But we actually try to improve a business, make it more profitable and grow it, and then sell it on at a higher price down the line. There wouldn't be any point otherwise."

Neil Sneddon, director of private equity funds for F&C Investments out of Edinburgh, said it was important for dealings to be transparent. "If you are not open it fuels the debate and people might then assume you are doing something that you should not be doing, which is not the case.

"At the end of the day we are making good returns for investors, often pension funds, some of which are local authorities, and involving a private equity market which, whilst still relatively immature, is fast becoming institutionalised."

Trade unions have labelled private equity executives no more than "casino capitalists", with numerous merger and acquisition investments involving operators having a free hand to indulge in questionable practices.

They also accuse them of bringing no long-term benefit to the companies they gobble up before selling on parts or all of a business for the highest possible return, with job losses as the outcome.

Marshall rebuffed this as he pointed to independently owned Dunedin's four largest investments, which he claims have collectively led to a 100% increase in employee numbers.

Yet doubts persist, and a Financial Services Authority discussion paper into the industry and possible regulatory risk has tasked a working group, under Sir David Walker, to tackle better disclosure into such private equity dealings, especially as most of the private equity cash comes from institutional investors such as pension funds, endowments, insurance companies and wealthy individuals who make direct investments.

Traditionally, private equity funds buy companies only partially with their own money, raising the balance as debt finance through the banks.

As global stock markets try to hold their nerve and recover from the worst falls since the September 11 terror attacks, it has even been suggested the private equity industry is mounting a serious challenge to the dominance of the quoted companies arena.

Kohlberg Kravis Roberts is a case in point. Its move on Alliance Boots followed a recent approach on J Sainsbury. Since its creation 30 years ago, KKR has completed 145 deals with a total value of 142bn. Its most famous scalp was RJR Nabisco, the American food and tobacco giant, for 12.5bn, at the time the world's largest leveraged buyout.

The overwhelming message from speakers at the EVCA Geneva forum was that the private equity industry has just had a vintage year. Records have been smashed in almost all areas and sectors of the industry.

A survey by Thomson Financial and PricewaterhouseCoopers, released during the event and outlining preliminary figures for European private equity performance and activity during 2006, showed "continued strong, consistent returns in terms of encouraging investors into funds and leveraged debt markets".