Jeremy Warner's Outlook: Water regulator comes over all soft dealing with nasty case of leakage at Thames Water

Stub equity? Thanks, but no thanks; Everyone's best friend: hedge funds; Now Hargreaves bans the press
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The Independent Online

Ofwat, the water industry watchdog, has turned out to have teeth made of putty. Having huffed and puffed and threatened to blow the house in at Thames Water over the company's disgraceful record on water leakage, Ofwat has determined to... do nothing about it at all. Thames Water's Germany owner, RWE, can scarcely have believed its luck as it prepares to refloat the company on the London stock market. Not only is there to be no fine, but the leakage targets for the next two years are to be further eased.

Philip Fletcher, director general of Ofwat, may be right to insist that it would be pointless to fine Thames; the money would simply end up with the Exchequer and therefore be of no benefit to customers at all. Instead he's secured a legally binding undertaking from Thames to spend an extra £150m - the maximum he could have fined the company - on plugging the leaks.

Yet he was being somewhat disingenuous yesterday in insisting this was all new, previously unannounced money. In fact Thames had offered up the extra spending voluntarily as a way of trying to buy off the regulator's wrath when it was originally announced that water leakage targets had been missed. The tactic has plainly worked.

Notwithstanding the payment of a record £216m dividend back to Germany, the company has escaped scot-free from its failure adequately to service its customers. With the company still losing more than 30 per cent of its water to leaks, Thames has already thought it necessary to impose a hosepipe ban and is now seeking an even more draconian drought order. If ever there was a time for the regulator to punish by way of example to others, this was it. Mr Fletcher has ducked his responsibilities.

Stub equity? Thanks, but no thanks

Ferrovial thought it was doing BAA investors a favour by offering them "stub equity" in its bid vehicle, Altitude Assets. In the end, there were so few takers that the equity offer had to be abandoned altogether; investors have pocketed the cash instead.

This will no doubt come as a relief to Ferrovial, which won't now have the administrative expense of looking after a mass of outside shareholders. Furthermore, the Spanish infrastructure company is saved from the public scrutiny which comes with having external investors.

Yet it must be a disappointment to the investment bankers nonetheless. Investors are always complaining about being frozen out of the spoils of private equity. Given the chance to participate, it appears they are just not interested. Lack of liquidity in stub equity is sometimes cited as the reason, yet in this particular case, the stuff was to have been traded on AIM, so the argument doesn't wash.

Or maybe investors simply think Ferrovial is overpaying. Whatever the answer, they won't be able to complain if eventually it turns out that Ferrovial has got itself another bargain. They were offered the opportunity to participate; they refused to take it.

Their failure to do so offers more evidence of the bankruptcy of ideas and thought at the heart of many of our traditional, long only investment funds. It's been a bad month in equity markets, and they had to boost the numbers somehow. Selling out of BAA must have seemed the easy option, even though there is nothing similar on the London market to replace the company with.

Everyone's best friend: hedge funds

Hedge funds are suddenly everyone's new best friend. The US has abandoned plans for heavy handed regulation that would have required funds with more than 15 US investors to register with the SEC, and now even the European Union is getting in on the act by promising root and branch deregulation. Better that than have them all move offshore, seems to be the thinking.

Despite often vitriolic political criticism of the industry, the EU published a paper yesterday urging policymakers to abandon rules that restrict access to such investment vehicles. Commissioned by Charlie McCreevy, the EU Internal Market commissioner, the report could hardly have been more welcoming if it had tried. This is admittedly largely explained by the fact that the report was drafted by a group of industry "experts", including representatives of some the largest hedge funds in the world - Goldman Sachs and Morgan Stanley. Even so, Mr McCreevy seems to have swallowed the arguments hook, line and sinker.

This, I guess, is all very much to be welcomed. If even the EU can now see the sense of "light touch regulation", then that's progress indeed. Yet regulators should be careful not to fall too much under the spell of these accomplished speculators.

This is not because they pose any kind of a threat to financial stability. The idea that they are about to bring the capital markets crashing down amid a violent unwinding of highly leverage derivative positions that nobody any longer properly understands is so much stuff and nonsense. To the contrary, by providing the markets with more liquidity, they make them more efficient, greatly reducing the risks of catastrophic loss.

Rather it is to do with the fact that hedge funds are in essence just a clever way of making investment managers a great deal more of money. Typically, a hedge fund will charge a 2 per cent annual management fee, which is at the very top end of traditional, active fund management.

On top, they will take up to 20 per cent of any upside, with limited or no exposure to any losses. Such charges would once have been regarded by investors as legalised theft. Today they are accepted as par for the course. No wonder all the top investment talent is drifting into hedge fund management.

Do you (a) toil away in traditional long investment management, struggling to earn your fee of 1.5 per cent or less a year; or do you (b) opt for 2 per cent instead together with rights to a fifth of any profits you earn. Tough choice. Some hedge funds are outstandingly successful investors; yet in the round they are just another way of jacking up the fees. Hey ho.

Now Hargreaves bans the press

Just what has John Hargreaves, chairman of Matalan, got to hide? There's plainly something, for he has banned journalists from today's annual meeting in Lancashire. I don't want to get pompous about this, for companies are under no obligation to include anyone other than properly registered shareholders. Yet excluding the press always smacks of at least a wish to censure embarrassing reportage, and is more often indicative of a desire to avoid public scrutiny altogether.

As far as Mr Hargreaves is concerned, there is nothing particularly new in the exclusion order. He gave up talking to journalists ages ago and has long banned them from his AGMs. Yet there is a particular reason for it this year.

Last week, Mr Hargreaves threatened to use his 53 per cent shareholding in the company to cut the dividend should shareholders decide to reject an as yet untabled attempt to take the company private. By common consent, the offer is unlikely to be generous. Outside shareholders are expected to have plenty to say about this attempted blackmail at today's meeting.

So infuriated is one of them, David Herro of Harris Associates, that he plans to vote his 7 per cent stake against Mr Hargreaves re-election as a director. It will be a hollow gesture, as Mr Hargreaves controls the company, but it sure will make everyone feel a whole lot better. Since the share price peaked five years ago, the company has stumbled from one profits warning to the next. The format looks tired and dated, and no longer has the merit of even being price competitive. Perhaps the dividend does need to be cut. As ever, Mr Hargreaves hardly helps his case by refusing to make it.

j.warner@independent.co.uk

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