Pressure on the Government over the botched Royal Mail sell-off intensified yesterday as more hedge funds were unmasked as key investors in the flotation and the chairman of a committee of MPs condemned the “corporate masonic lodge” that profited at the expense of taxpayers.
After resisting months of pressure to name the 16 priority investors who were allowed to buy a 22 per cent stake in Royal Mail ahead of the public, the Business Secretary Vince Cable finally buckled on Wednesday.
The list – which is highly embarrassing to Mr Cable – reveals the Government’s preferred investors included some of the most aggressive hedge funds in the world as well as investment firms which had close links to the financial institutions paid by the Department for Business to advise them on the sale.
The equity arm of Lazard, the department’s key adviser on the sale, was among those given “priority” status reserved for long-term investors. However, as the shares rocketed, Lazard Asset Management sold its entire stake within a week at a profit of £8m. It was able to turn such a huge profit because priority investors were given extra allocations of shares – in Lazard’s case worth £19.8m.
While there is no suggestion that any rules were breached and Lazard said there were Chinese walls between its two divisions, the apparent conflict of interest added to the public’s impression that the Government was left blindsided by a sophisticated City operation, leaving taxpayers out of pocket.
It was also revealed that Goldman Sachs, another government adviser on the sale, is partially owned by some of the investment companies which were also given priority to buy a stake in the new business. Both companies have strongly denied any allegations of wrongdoing.
But Margaret Hodge, chair of Parliament’s financial watchdog the Public Accounts Committee, told company representatives who were appearing in front of her committee: “You have 16 priority investors who made a killing [out of the sale]. And it leaves the general public with that uncomfortable feeling that there is just too cosy a relationship between [you] and these investors.
“You all know each other. You work together. You trade with each other. You are part of this little clique and we the ordinary taxpayer lose out on it.
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“That is really, really uncomfortable. It just feels wrong. It almost feels to me like an institutional masonic lodge.”
Also on the list were several of the most aggressive international hedge funds – despite Mr Cable saying the Government’s priority was to establish “a core of high-quality investors” that would be there in “good times and bad”.
One of hedge funds was Third Point, founded by Dan Loeb, who is known as one of the most ruthless investors in the world. He became known after buying a $1bn stake in Sony and then demanding huge cost-cutting at its entertainment division.
Another of the hedge funds given a stake was Lansdowne Partners, whose former boss and co-founder Sir Paul Ruddock was a big donor to the Conservative Party. Peter Davies, who sits on the management committee, was the Chancellor George Osborne’s best man at his wedding.
The disclosures triggered a dispute at Prime Minister’s Questions, with the Labour leader Ed Miliband claiming the firms had been allowed to make a “fast buck” by selling their holdings as the price rose in a “rip-off of the taxpayer”.
“The sale was grossly undervalued – shares sold for £1.7bn at privatisation are now worth £2.7bn,” he said. And who cashed in? Twelve of the 16 so-called long-term investors made a killing worth hundreds of millions of pounds within weeks,” he said. “The more we know about this privatisation, the bigger a fiasco it is. A national asset sold at a knockdown price, a sweetheart deal for the City and the Government totally bungled the sale. Everything about this privatisation stinks.”
David Cameron defended the sale, insisting it was “a success for our country”.
But during the PAC hearing, representatives of Goldman Sachs, Lazard and UBS, who were all employed to advise on the Royal Mail privatisation, denied any suggestion they had undervalued the firm or provided preferential treatment to corporate investors. They were backed by Martin Donnelly, Permanent Secretary at the Department for Business, who said he was satisfied by the way the process was conducted.
Richard Cormack, a managing director at Goldman Sachs, told the committee that he had “absolute confidence” that the process was “appropriately undertaken”. “There was no impropriety at all,” he said.
William Rucker, chief executive of Lazard, told the committee that at the time of the appointment as advisers they had been unaware of the discussions between the firm’s independent asset management arm and Royal Mail over buying a stake in the firm.
“When we became aware, having been hired, that Lazard Asset Management were on a list of investors the Royal Mail were talking to, we made it quite clear that we should have no input whatsoever into any discussions about allocations for LAM,” he said.
“The Chinese wall is complete and utter. We have had no contact throughout.”
Both men said there was significant uncertainty over what price Royal Mail shares could be sold for in face of the threat of industrial action.
Asked whether Mr Cable had expected 42 per cent of the shares to be traded within the first week, Mark Russell, chief executive of Shareholder Executive, which manages the Government’s shareholding, replied: “No... A number of them [investors] sold because the price took off. Simple as that.”