Furious MPs accuse private equity chiefs of 'behaving like ostriches'

Britain's private equity industry was savaged by the Treasury Select Committee yesterday as MPs accused its leading trade body of failing to answer questions properly, submitting "bland" evidence and "behaving like ostriches".

And after an ill-tempered session, the debate spilled out into the corridor, with the senior Labour committee member Angela Eagle holding a heated argument with the Tory Brooks Newmark, who used to work in private equity and is an adviser to the shadow Chancellor, George Osborne, before renewing her attack on the industry.

Ms Eagle insisted that she was not opposed to all private equity but accused the industry of "being in denial" about the controversies surrounding it, such as the perceived tax breaks it enjoys and mounting criticisms about the way it treats workers.

She said: "Private equity is not bad in itself but as they [private equity firms] get bigger they have to realise they have an economic and social role. They have to be more transparent.

"If they want to behave like ostriches, they will behave like the British Venture Capital Association did today. What has got the committee all riled up is that they have failed to answer our questions." She described the organisation's evidence as "very, very misleading and irritating".

Speaking after the hearing, the Wallasey MP, who has served on the committee since 2002, was particularly critical of the private equity firm Duke Street Capital for the way 660 jobs have been axed from the biscuit maker Burton Foods' factory in her constituency on the Wirral.

During the hearing, MPs asked the BVCA's chairman, Wol Kolade, chief executive, Peter Linthwaite, and vice-chairman, Jeremy Hand, whether they could justify the "taper tax relief" on capital gains available for investments in private equity. This sees some partners at private equity firms paying tax rates as low as 5 per cent on multimillion-pound gains as little as two years after deals have been struck.

They cited Nicholas Ferguson, one of the industry's leading figures, who last week said that it "can't be right" that multimillionaire executives sometimes paid "less tax than their cleaning ladies".

Mr Hand sought to defend what is widely seen as an unfair tax break, saying it had been "put in place for two million private companies from Richard Branson's Virgin to the guy and his garage, not just those owned by private equity". He insisted that there is "no differential between [the tax treatment of] private and public companies. There is no special deal".

He also claimed that private equity firms paid more tax than some private businesses by investing in portfolios of companies. He complained that this meant they missed out on tax credits available to individual businesses.

His claim drew an angry response from the committee. The chairman, John McFall, warned: "There is a progressive tax system in the UK. The private equity industry should not be an exception to the progressive tax system because it is good for the country."

Earlier Will Hutton, chief executive of the Work Foundation, said that there was "a growing consensus" that action should be taken to stop private equity exploiting tax breaks. A group of academics, who largely defended the industry, agreed that the tax break was hard to justify.

Mr Hutton also said there was a problem with the structure of markets in the UK. Critics have questioned whether it is right that borrowing to buy companies is treated favourably for taxation purposes. This has helped to fuel a tide of private equity takeovers of public companies.

MPs on the committee joined Mr Hutton in voicing concern about the ever-increasing levels of debt being used to finance buy-outs of companies, an issue that on Monday prompted the Financial Services Authority to order banks to detail their exposure to private equity deals.

Mr Linthwaite admitted that increasing debt levels "is an issue" but insisted that it was "looked at very closely by those private equity firms involved in any deal". He also insisted that banks "scrutinise deals very carefully" before lending money.

Earlier the TUC general secretary, Brendan Barber, had joined the chorus of criticism facing the industry by saying that the interests of employees "can be bought and sold like the cheapest chips at the bottom of the roulette table".

He continued: "I don't think all public companies are good and private equity is bad. The difference is that in plcs there are levels of accountability and transparency that are very different from [what happens] in the private equity world."

He was backed by Mr Hutton, who said the foundation's evidence suggested that workers faced a "harsher" regime under private equity when compared to public companies, and questioned whether they actually created as many jobs as claimed.

Mr Barber said that the tax system needed to be "re-examined" to ensure that private equity and the moneymen behind it did not have an unfair advantage.

Mr Kolade sought to defend the industry in the face of increasingly hostile questioning from predominantly Labour members of the committee.

He warned that the UK had slipped from first to third place in the European league table of the best countries for private equity to do business, and claimed that it could harm Britain if the conditions for the industry further deteriorated. He said: "The UK is the second largest private equity market in the world. It is part of the financial services industry, which is a jewel. Financial services is one of the few world-class industries we still have in this country."

But MPs felt that his organisation had done a poor job in defending the industry, which has shot to the top of the agenda as an increasing number of household names have been swallowed by private-equity funds which have been doing ever bigger deals funded by ever-increasing levels of debt.

Next week the committee will hear from some of the industry's leading players. Ms Eagle said she had invited Duke Street to appear in the wake of the Burton job losses, but that her attempts to contact the firm had met with failure.

A spokesman for Duke Street said: "Duke Street Capital actively supports management plans to grow Burton's as a business to the benefit of all stakeholders over the longer term. We have already agreed to Angela Eagle's initial request for a meeting and look forward to talking to her."