Brown backs private equity firms

Gordon Brown praised the private equity industry's ability to create jobs yesterday despite the scathing attack on the sector from trade unions concerned over job losses.

The Chancellor's defence of the controversial sector coincided with a move by the industry to establish a voluntary code aimed at improving disclosure and transparency. Sir David Walker, the former chairman of the Securities & Investments Board and previously an executive director of the Bank of England, will chair the working group and expects to have a code in place by the autumn.

Mr Brown is the latest Labour politician to address the private equity issue amid a growing storm around the industry. Trade unions and some Labour politicians have lambasted private equity companies for asset stripping, job cutting and a lack of openness over recent weeks as a potential bid for the supermarket chain Sainsbury's has thrown the publicity-shy industry into the spotlight.

Speaking in Parliament yesterday, Mr Brown said he wanted to "congratulate" the private equity industry for the "creation of more jobs at a faster rate".

"There is much evidence that the rate of job creation through private equity has been high," the Chancellor said. "We've got to distinguish between companies that are long-termist and short-termist," he added.

Mr Brown's defence of the sector comes in the wake of Tony Blair's public support of private equity investment this week. It follows news that Texas Pacific, one of the world's largest buyout companies, has exited its controversial investment in Gate Gourmet, the airline catering company that has been plagued by industrial action and financial problems since it was purchased in 2002. Texas Pacific has sold its remaining stake in the company to the investment bank Merrill Lynch.

Over recent weeks, the traditionally secretive private equity sector has been forced to defend its strategy in the face of stinging criticism. The annual Super Return conference in Frankfurt this week has been characterised by some of the sector's leading lights calling for greater openness and transparency.

The British Private Equity and Venture Capital Association (BVCA) has been working toward establishing a code to improve disclosure for some time. Paul Waller, managing partner of the venture capital company 3i and chairman of the European Venture Capital Association, said earlier this week that the process has been accelerated by the recent storm around the sector.

Ed Balls, Economic Secretary to the Treasury, said: "I welcome today's announcement from the BVCA and with it the commitment to increase transparency and disclosure. Private equity is an important part of the UK financial services sector and can play an important wider economic role creating jobs and developing companies. The Government will be watching progress very closely."

The move reflects the increased scale of an industry that has grown rapidly over the past few years but also the increased awareness that private equity has gained on the back of a number of massive deals to take high-profile public businesses private. Nine of the 10 largest-ever private equity deals have taken place over the past two years.

The subsequent publicity has forced some of the largest players to come out of the shadows, but mid-sized players are fretting that the increased disclosure requirements and public scrutiny of turnaround strategies could harm the prospects of the whole sector.

Jon Moulton, the head of Alchemy Partners which bought the British car maker Rover earlier this decade, argued that it is the "mega funds" that have made the large public-to-private deals that have "exposed us to more adverse publicity". He noted that venture capital companies have traditionally had a positive public profile for funding small start-up businesses and creating jobs without attracting the same scrutiny as a listed company.

Guy Hands, the head of Terra Firma, also warned that the returns the industry has traditionally achieved could be affected if buyout companies have more stringent disclosure requirements and increased regulatory pressure.

Rod Selkirk, chairman of the BVCA, said it will look to protect the interests of smaller companies when establishing the industry's disclosure code. "This working group will be fully attentive to the need to avoid any additional reporting burdens on the smaller companies backed by private equity and venture capital," he said.