Business and Trade Committee
Oral evidence: Private equity and the retail sector, HC 416
Tuesday 9 January 2024
Ordered by the House of Commons to be published on 9 January 2024.
Members present: Liam Byrne (Chair); Douglas Chapman; Jonathan Gullis; Ian Lavery; Julie Marson; Charlotte Nichols; Mark Pawsey.
Questions 107 - 213
Witnesses
I: The Rt. Hon. Michael Moore, Chief Executive at British Private Equity & Venture Capital Association; Emma Gilks, Deputy General Counsel at TDR Capital; Blair Thompson, Chief Operating Officer at TDR Capital; and Gary Lindsay, Managing Partner at TDR Capital.
Witnesses: Michael Moore, Emma Gilks, Blair Thompson and Gary Lindsay.
Q107 Chair: Welcome to today’s session of the Business and Trade Committee, I am very grateful to you for coming along and joining us. Our session today is around some follow-up questions we have after the acquisition of Asda, and looking at the more general question of private equity and whether there is a debt bomb under the British high street. I would be really grateful if our witnesses could introduce themselves for the record and then we will get into it. Michael, welcome back.
Michael Moore: I am the chief executive of the British Private Equity & Venture Capital Association.
Emma Gilks: I am deputy general counsel at TDR Capital.
Gary Lindsay: I am managing partner at TDR Capital.
Blair Thompson: I am chief operations officer of TDR Capital.
Q108 Chair: Thank you. This Committee was very concerned about some earlier evidence Asda gave to the Committee, and when it came back to give further evidence at the end of last year that provoked a few new questions about whether, in an environment where interest rates are going to be higher for longer, we have, basically, a debt bomb under the British high street.
We have a number of businesses like Asda, Iceland, Morrisons and Stonegate pubs, for example, that together employ about 350,000 people in this country. The private equity model creates big tax incentives for people to load up some of these companies with a lot of debt. In the private equity industry, there are a lot of personal tax incentives, for example, on the arrangements around carried interest, which again creates a particular kind of incentive. There is often tremendous secrecy around some of these accounts, and that was revealed as a big problem with Asda. Together, these things are creating what we think is quite a risky environment, and what we learned from the collapse of Wilko is that when things go wrong, it is taxpayers, workers, suppliers and creditors who carry the can.
When you look at this environment, the lack of regulation over some of the investments that are made is a cause for concern. If you were a bank, for example, there would be all kinds of rules around prudential investment, but we do not have those kinds of safeguards when it comes to the venture capital industry. That is why we are very grateful for you coming along today to answer a few more questions and hopefully put our minds at rest, but also for us to flush out some implications for Government policy in the future.
Michael, perhaps we could start with you and open the bowling with a fairly straightforward question about how you see the venture capital industry creating value for the British economy.
Michael Moore: Thank you very much, Chairman. These are important questions, and I am glad to have the opportunity to address them.
The private capital industry in the United Kingdom, which comprises both private equity and venture capital, has grown substantially over the last 40 years and now owns significant parts of the UK economy across different sectors. The focus here today is on consumer-related investments, but the private capital industry has holdings from the earliest of start-ups to the biggest, most mature companies.
A report we commissioned last year estimated that there are now over 2 million people in the United Kingdom employed in businesses backed by the industry, and those businesses generate approximately 6% of GDP. The industry invests significantly in the UK; there was £27 billion of it in 2022 and that is invested across the whole country.
The investors—the private equity businesses or the venture capital firms—are ruthlessly focused on growth. The whole model is based on increasing the value of the businesses in which those investments are made. It is an active ownership model, so TDR and its counterparts are very engaged in the businesses in which it has invested. It has a very strong commitment to corporate governance, and it is very much focused on a long-term approach to its investment.
Q109 Chair: Is the sector addicted to debt? When you look across those businesses, which now employ what looks like about 10% of the British workforce, how much debt do you think your members are taking on right now? Do you have a sense of what the overall debt level is?
Michael Moore: We do not collect the numbers across the industry, but I think it is worth saying that there is a range of different approaches to debt within the industry.
Q110 Chair: So we do not know how much debt venture capital-backed businesses currently carry.
Michael Moore: Venture capital-backed businesses tend not to have any debt at all: they are focused on early-stage start-ups—
Q111 Chair: And private equity-backed businesses?
Michael Moore: Private equity depends on where they are invested and what type of business they are buying.
Q112 Chair: But, right now, we do not have a sense of what the overall debt level is. So we do not know how much risk the private equity industry is carrying this year.
Michael Moore: The individual firms and the funds through which they invest have debt figures for each of their investments.
Q113 Chair: But you do not collect that as the BVCA.
Michael Moore: We do not, no. Nevertheless, a lot of debt at the larger end of the industry is publicly quoted. It is out there; a lot of disclosure is made around what it is.
Q114 Chair: If the Treasury and the Bank of England come to you and say, “Look, Michael, we are really worried that the private equity industry is over-leveraged”—the Bank of England is already worrying about corporate over-leverage. If they come to you and say, “Are your members over-leveraged?”, you cannot really answer that question right now.
Michael Moore: We do not collect the debt figures, which tend to change reasonably significantly over the ownership period that a private equity business might have it.
In terms of the private equity part of the industry, which is primarily focused on owning majority stakes in business—venture capital firms take minority stakes as a rule—there is a range of approaches to debt. Some businesses take no debt or have a low level of leverage, and others will have higher levels. What influences that is the ability of the underlying asset to deliver the growth and the associated cash flows, which will then pay down the debt and increase the capital value of the business and, therefore, the fund value as a whole. The different economic interests in the business are represented by different types of debt holders as well as different types of equity holders.
Q115 Chair: But are there any particular sectors that you see among your membership where debt levels are particularly pronounced?
Michael Moore: I would not draw particular attention to sectors, but the model is very much focused on ensuring that the debt is sustainable for the business to which it is applied.
Q116 Chair: Let us get into that with Gary Lindsay. Gary, the Financial Times has said that TDR Capital prides itself on “never” having “had a portfolio company go bust” since it was founded 20 years ago. What is the strategy that TDR Capital has used to deliver that kind of outcome?
Gary Lindsay: Thank you for the question, Chair. There are probably two distinct aspects of TDR’s business model relative to traditional private equity, as some members of the Committee might think about it. First, we are incredibly long term; certain portfolio companies we have owned for 20 years, others 15, and many of our existing portfolio a decade. Clearly, that is a very long-term view, which is often different to public markets that are focused on the next one or two quarters from an earnings growth perspective.
Secondly, the majority of the capital that we invest alongside our investors is our own. That means not only that we have significant skin in the game, but that we care deeply and passionately about each and every business that we own. It also means, from a leverage perspective, we tend to be extremely cautious and disciplined when it comes to risk.
Q117 Chair: If you take Asda in particular, what is the breakdown of your fee structure? Do you take management fees or are you just being paid on carried interest?
Gary Lindsay: We get paid through the co-invest, so that is our capital that we roll into each fund and, by extension, each investment. Clearly, if the investment is successful there may well be a carried interest component on top, but again that is a very variable remuneration structure and only payable once we have exited the business.
Q118 Chair: Is there a management fee when it comes to Asda?
Blair Thompson: It is probably helpful to distinguish between the funds we manage and the portfolio companies that that fund owns. So we—as is typical for the industry—have a fund structure that charges management fees to the investors in that fund, and the investors in the fund will pay a management fee to the fund manager in order to manage it.
Chair: That is what—5%?
Blair Thompson: No—in our buyout space, between 1.5% and 1.75%. That is to distinguish between portfolio companies. We do not take any fees or charge any management fees or anything to Asda, so it does not pay us anything as a result of our ownership in the business.
Q119 Chair: How will you, as TDR Capital, get your return from Asda?
Blair Thompson: Through successfully growing Asda. If we are unable to grow that as a business, we do not get paid anything from Asda. We are hugely aligned to ensure that that business does grow; otherwise, we are not successful and our investors are not successful.
Q120 Chair: What were your goals when you took on Asda? Often you will buy into a company, try to add value to it, and then exit it. The implication from the evidence we heard before Christmas was that that was the game plan for Asda, but it would be useful to hear your strategic goals.
Gary Lindsay: The strategic goal for Asda was very much focused around growth, and that is something that, as TDR, we have had a fair amount of success at doing for the better part of 25 years. If we look back over the average portfolio company that we have owned over that timeframe, we have doubled revenue, doubled the number of employees and trebled profit.
Clearly, in a mature, reasonably low-growth market such as grocery in the UK—one of the most competitive in the world—we went into the Asda investment with an incredibly long-term view, given how long we forecast that improvement would be. We went in with our eyes wide open on the quantum of capital that it was going to cost to ultimately grow Asda. If you recall, Asda was part of Walmart for the better part of two decades, but within the broader Walmart group, it was a very small piece—around 2% of Walmart’s global revenue. By virtue of that, for most of that time, the business was being run for cash, and it was not, in fact, growing. You can see that in some of the third-party market share data—Kantar is quite a widely sourced reference—over the better part of 10 years prior to our ownership.
Q121 Chair: Where did the loans come from for TDR to buy into Asda?
Gary Lindsay: That was a set of financial arrangements that were accessed through debt capital markets, predominantly in the UK.
Q122 Chair: How much of the loans came from other companies in the TDR portfolio?
Gary Lindsay: If you look at the entire capitalisation—so leverage completely third party—of the equity, there was a shareholder loan component of around £580 million that came from EG Group.
Emma Gilks: I can add to that: the total equity amount invested by TDR and the Issa brothers was £780 million. Part of that investment was equity and part was a shareholder loan. Just to be clear to the Committee, both elements are commercially seen by us as equity. We are the highest in the chain in that regard, so that should not be seen as the same as the external debt within the business. That does not impose any greater obligations or difficulties on Asda but it means that once we are paid back at the end of our investment, part of that will be repaying shareholder loan and part of it will be paying—
Q123 Chair: But a significant part of that loan came from EG Group.
Emma Gilks: It was from a holding company that is owned by TDR, funds managed by TDR, and the Issa brothers. So it is from a holding company, not the actual operating group.
Q124 Chair: Was there a loan in any way that was raised against assets in the EG group?
Emma Gilks: We did raise equity on the EG side.
Q125 Chair: How much was that?
Emma Gilks: £580 million.
Q126 Chair: Did the business have that money or did you have to go out and borrow through EG?
Emma Gilks: We raised preference equity in the EG structure, which was loaned to Asda as part of the overall equity funding for the business.
Q127 Chair: Is that constraining the cash flow now of EG Group?
Emma Gilks: No.
Q128 Chair: What debt, then, is going to need to be refinanced for the TDR portfolio this year?
Gary Lindsay: The broader portfolio—the one that springs to mind is Stonegate, our pub company.
Q129 Chair: You have about, what, £2.5 billion there?
Gary Lindsay: Yes, in round numbers. That is a business that we have owned since 2010. It was a non-core disposal by one of the UK plc pub groups. It was around 330 pubs—today, 4,500 pubs. But that is, as you referenced, Chair, around £2.5 billion of sterling debt—
Q130 Chair: But as far as TDR is concerned, that is the only debt that needs refinancing this year.
Gary Lindsay: Yes. From a purely contractual perspective, yes.
Q131 Chair: Do you have a sense about what the rise in interest rate costs will be?
Gary Lindsay: On Stonegate, it is probably a 300, 400 basis point increase in the overall cost of capital to Stonegate.
Q132 Chair: What is that in hard cash this year?
Gary Lindsay: I would need to come back to you on the specific number; I do not have that to hand.
Q133 Julie Marson: Gary, perhaps I can carry on with questions to you about the debt when Asda acquired Euro Garages Jersey. As you alluded to, there was already a close relationship between the EG Group and Asda. Why did you have to put so much debt on the Asda balance sheet when you acquired that? What was the thinking there?
Gary Lindsay: From our perspective, I do not think we put a significant amount more debt on the Asda balance sheet. If you look at that EG UK acquisition, it was pretty much analogous to the Co-op convenience store acquisition that we made around six or nine months previous. As we stood back and looked at Asda prior to our acquisition—I have referenced the reasonably low-growth nature of UK grocery given the competitive forces in that market—we highlighted convenience in food and beverage as a very synergistic and interesting growth vertical. We acquired the Co-op business for around £400 million, and the equivalent analysis on the EG UK side is around £650 million of additional leverage, but obviously for a bigger quantum of earnings. When you look at the overall leverage impact on Asda of EG UK, it is neutral from an underlying cash flow multiple perspective.
Q134 Julie Marson: The net effect was a huge transfer of that debt from EG to Asda though, was it not?
Gary Lindsay: I think we view Asda as a highly cash-generative business, but I want to be clear with the Committee: when we sit down and talk about Asda on a look-forward basis for any given 12-month period, it is growth first and foremost that we allocate capital against. To put the numbers in context, in the first three years of our ownership we have invested organically £1.3 billion in the business—that is on IT and stores and clearly a very significant investment in colleagues, which I am sure we will come back to. And then, from an inorganic perspective, or an M&A perspective—we very much view both buckets of capital as highly strategic for the business—that is around £2.5 billion of total capital commitment.
Q135 Julie Marson: Is it a case that it is grow or die for the business?
Gary Lindsay: That is true of any business if you take a very long-term view. But to Michael’s point, when we go back and look at our track record—that is what we are most qualified to talk about—it is probably synonymous with private investment and private capital investment more generally. Yes, growth is absolutely at the heart of everything we do with every single portfolio company. For us, that is very relevant for every single stakeholder in the business, from colleagues on the work floor who are clearly the lifeblood of any business—but in particular to Asda—all the way through to our ultimate investors, some of which are reasonably prolific pension and insurance funds, with some being based in the UK.
Q136 Julie Marson: Market share has actually gone back 4% in the last 10 or 12 years; it is a hugely competitive market. In that context, where will the growth come from?
Gary Lindsay: To the market share comment, we are focused on trajectory. Yes, I absolutely hear your point and I think your information is accurate with respect to the amount of market share that the Asda business has given up in the last decade. When we look at the data, we have arrested that decline. Again, you have to be a little careful of very narrow timeframes, but there is an argument to say we have been growing market share, or when the investment that we have made in the business bears fruit, market share will increase. But absolutely, it is a very, very competitive industry.
Blair Thompson: I think it is probably important to note, and Gary referred to it, that the acquisition of the Co-op stores and the EG stores are part of that growth story. For a long time, under previous ownership, Asda had concentrated on large supermarkets; it did not have a convenience offering in the way that its competitors did. That was one of the opportunities we identified and we were willing to commit capital to support that. So now, with those investments, we expect to see an impact on growth of the business going forward, particularly in the convenience space.
Gary Lindsay: To Blair’s point about the investment in both of those acquisitions, part of our thesis was that the Asda brand was under-penetrated in the UK market relative to competition—in particular, in the convenience format, but in other size formats as well. If we look at the Co-op acquisition under an Asda banner, we have reduced prices by 9%, and in the EG business, which is in the process of being rebranded to Asda, by 11%—so real economic value back to customers.
Q137 Julie Marson: Can I just be clear? In terms of the growth, what do you see the trajectory being, and where is it going to come from? Is it going to be fuel? Is it going to be the core Asda retail business?
Gary Lindsay: Ultimately, it is going to come from more customers deciding and choosing to shop at Asda versus the competition. It is still early days; we are only in year three of this investment, which, from a TDR perspective, we view as an incredibly young investment. But we have made some interesting headways into increasing the footfall through the front door of Asda.
Q138 Julie Marson: What is your view of the borrowing costs and the impact that that is having? Obviously, it has been going up and that is going to have a huge impact on a very marginal—in terms of the whole market—business, isn’t it?
Gary Lindsay: Yes, Asda is very cash-generative, so that is point one. Point two is that for most of our investing career, we lived and invested in a world where base rates were 5%, 5.5%. So while it has been great for the Asda business to enjoy a lower cost of capital for the last three or four years, that was never a central tenet of us investing in the business, or us modelling different debt service costs as we calibrated that growth agenda. We feel more than comfortable with the leverage level at Asda, and we feel more than comfortable that when we decide to refinance the balance sheet in the next two or three years, the business can more than absorb that incremental cost.
Q139 Julie Marson: What about the TDR group as a whole?
Gary Lindsay: We do not own that many businesses—we only own 14—so that means that across a team of 85 people, we can leverage a huge amount of expertise, a huge amount of knowledge and a huge amount of work, if that is what is required to deal with any issue that we see in the portfolio. Again, and this goes to our conservatism as a firm, we always reserve capital at the fund level, both for offensive initiatives and defensive. We know the world is very rarely a straight line, so there is insurance at the Asda level and then there is insurance at the TDR level.
Blair Thompson: Perhaps it is also relevant that in the private equity model, as we have, each of the businesses we own is self-contained. So if unforeseen events happen on one portfolio company that have a negative effect, that does not then have a contagion into other portfolio companies. The debt, if there is debt on a business, is limited to that portfolio company. It is not an obligation of the other businesses the firm owns, and that is common with most private equity, or private equity managers.
Michael Moore: Indeed it is. It is fundamental to the model that the debt will be put with the portfolio company. Just stepping back momentarily if I may, the key for the industry has been that it has been in existence for 40 years or so, and over that time it has gone through many economic cycles. The feature that Gary just highlighted about the approach at TDR is replicated elsewhere, in that when things get tougher, typically the private equity businesses invest through downturns rather than shutting up shop and hoping for the best. The active ownership model and the fact that growth is how they and others will be rewarded is key to bringing on that further investment.
The resilience of private equity-backed businesses through the great financial crisis was found in academic research to be, broadly speaking, better than other forms of private business. Chair, earlier on you talked about the leverage for the industry as a whole. If I might just highlight—
Q140 Chair: I am going to let you come back to that in a moment—I want to finish pursuing that point. Mr Issa told us about leverage at Asda before Christmas. We pointed out that, I think, Fitch has looked at leverage ratios of about six and we were told it was 3.8—ex-leases. Do you want to just unpack what that means for the Committee?
Gary Lindsay: You are absolutely right; you need to look at the underlying definition and the capital market. So the bondholders, the term loan holders in the business, they will look at leverage without the operating leases, so that is the 3.8 times leverage multiple that Mr Issa referenced. Different rating agencies have slightly different definitions.
Q141 Chair: It does not help the market understand risk very well if you have such a wide range of leverage ratios.
Gary Lindsay: I think the market is sufficiently well-versed in rating agencies and their different definitions of different levels.
Q142 Chair: So the number we should be worried about is 3.8?
Gary Lindsay: Yes, 3.8. It is difficult for us sitting here today to give a very current update because we have publicly listed debt security, so there is a material non-public information wrapper around this, but the business has deleveraged since Q3.
Q143 Chair: When it comes to Stonegate then, you have lost Manjit Dale from the board, you have debt of £2.5 billion, you have a debt increase of about £650 million and you have significant loans maturing this year. It is not completely clear that the cash in the business can cover that interest payment at the moment. Do you want to tell us what the plan is for de-risking Stonegate?
Blair Thompson: We are in the process now of taking appropriate actions to extend the debt load on that business. It is important to bear in mind that this is a business that has grown significantly since it was formed 10, or 13 years ago, when we first put it together. But it would be unfair of us to ignore the fact that for the thick end of 18 months, that business was closed completely. So, during covid, hospitality businesses like Stonegate were completely closed, and as a result, that had negative effects on the cash flows and profitability of that business, which we are now taking active steps to remedy and mitigate.
Q144 Chair: How confident are you that you can refinance this debt?
Blair Thompson: We are very confident of that: it is a very strong business, with a very strong management team, and it is growing. So we are confident that that business will be able to put in place steps to mitigate the impact of the closures that it suffered in 2020 and 2021.
Q145 Chair: I understand that TDR missed the accounting deadline of the end of March 2023 for filing its accounts. Why?
Blair Thompson: No, that is not the case, sorry. We filed our accounts on 22 December and we have confirmation that those were received by Companies House. When it updates its website, you will find that those were filed.
Q146 Chair: So your accounts were in on time?
Blair Thompson: Eight days early.
Chair: Well done.
Q147 Charlotte Nichols: I just wanted to come back to the Chair’s point about lease liabilities and something Julie referenced in terms of Asda’s strategy. According to its accounts, Asda received £400 million for its sale and leaseback of its warehouses in 2021 but was saddled with £1.17 billion in lease liabilities for doing so. The cost of this has obviously increased as interest rates have risen, with The Guardian reporting that total interest costs, including leases for Asda, are “likely to be more than £400 million”, which is what it received for the sale and leaseback of the warehouses. How does that drive growth, in the way that you have been explaining to the Committee this leveraging is doing within the Asda group?
Gary Lindsay: I am not sure I recognise all those numbers, Ms Nichols.
Emma Gilks: I think the £400 million number that you are quoting is the total finance costs, including leases, but including external interest within the business. I recognise broadly that number.
Gary Lindsay: When you say the warehouse transaction, are you referring to where we sold distribution assets to Blackstone?
Charlotte Nichols: Yes.
Gary Lindsay: The incremental gain we made on that piece of business, that capital, has stayed in the business. It has supported some convenience investment that we made from an inorganic perspective. It has gone to fund some organic investment as well. The Asda team, and Mr Issa specifically, were incredibly clear that no dividends had been taken out or extracted from the Asda perimeter. For the record, we want to be crystal clear on that. As we underwrote the value of that real estate at a lower level than the market ultimately paid us when we took those assets to market, that gain has gone back in to support growth. More than that, it has locked in a very attractive long-term cost of capital for Asda.
Q148 Charlotte Nichols: Selling something you already own for £400 million and then taking on a £1.17 billion liability in doing so does not seem like a particularly wise investment, on the face of it.
Gary Lindsay: It is if you believe you can invest above the cost of that finance. From a return on capital perspective, as we look across the Asda business in convenience, we think we can, by definition, create enterprise value or intrinsic value for the broader Asda group.
Q149 Chair: So the argument is that you have new debt service costs, you have new lease costs, but you can still turn a profit by growing the business in convenience.
Gary Lindsay: Provided we can generate a return on capital by reinvesting that capital into the Asda business at a higher level than the cost of those lease payments. We are confident of that so, by definition, we can create enterprise value, yes.
Q150 Mark Pawsey: I am going to ask Michael Moore a broader question about private equity, but I want to come back to Mr Lindsay first, if I may, about the Asda strategy. You are telling us that TDR Capital identified this big operation in the UK that had been badly managed, essentially by Walmart. It was only 2% of its worldwide business; it was not too focused on it. You saw a large opportunity to get into the convenience sector, which Asda had missed out on at the time its main competitors had gone down that road. Given the magnitude of that opportunity and the fact that you only have 14 businesses, with 85 people managing them, and a lot of expertise, why the Issa brothers?
Gary Lindsay: By way of clarification, for the record, I do not think Asda was poorly run prior to our ownership. I do not think I said it was, but if I did then I did not mean it.
Q151 Mark Pawsey: It was an opportunity.
Gary Lindsay: It was run to a different set of financial metrics. It was not run for growth; it was run for cash dividend. By definition, that resulted in a set of different behaviours that ultimately meant the business was not growing.
Q152 Mark Pawsey: You saw an opportunity there.
Gary Lindsay: Yes. We saw an opportunity to grow the business, not only within that core grocery segment. I am conscious of time, Chair, so I do not want to repeat all the initiatives we have already mentioned.
Chair: We have all the time in the world.
Gary Lindsay: We have referenced the £1.3 billion of organic and the £2.5 billion of inorganic investment, and more than that, £130 million in 2023 alone into retail prices. As we looked at the Asda business relative to competition prior to—
Q153 Mark Pawsey: The key part of my question is: why the Issa brothers?
Gary Lindsay: I am coming to that. We realised the Asda business, from a commercial perspective, was not as sharp as it could be and, from a colleague perspective, not as engaged or as collaborative as it could be.
Specifically on Mohsin and Zuber—we had obviously had a lot of success with the EG Group. We grew that from a really small UK business, focused on the gas station convenience and food service segment, into a global player. That business, at its essence, was owning and operating a lot of real estate close to a lot of people. We were always racking our brains as to how we could fit as many different convenience and food service propositions into one small box that is possible to satisfy more customer missions and ultimately, to become more embedded, more sticky, with that customer. We flipped that on its head when it came to Asda. We said, “We’ve got these 80,000 to 100,000 square foot boxes, how can we repurpose, rethink, and innovate that space?” Mohsin and Zuber, in our view, are two of the most successful entrepreneurs the UK has produced in the last—
Q154 Mark Pawsey: Running a petrol station is different to running a several hundred thousand square foot supermarket chain, is it not?
Gary Lindsay: It is, but there are definitely parts that are analogous. If you look at what we are doing with the business now in terms of the IT cut-across from Walmart, Mohsin has done that in different jurisdictions historically in the US and Australia.
If you think about integrating two convenience acquisitions, rebadging those to Asda, landing that project, driving the value through experience and expertise, and if you look at some growth vectors within the more conventional Asda grocery business, then fundamentally it goes back to how we serve our customers more effectively. Again, that is pretty analogous with the business they had built at EG Group.
Q155 Mark Pawsey: One reason why you are sitting in front of us today is because we took evidence two sessions ago, in respect of fuel pricing, when Mr Issa did not give a wholly convincing account of the state of Asda. That is really why this is taking place. Do you still think they were the right horses to back?
Gary Lindsay: We do, and that has not changed. Mohsin, by his own admission, was not pleased or proud of his first attendance in front of the Committee. I hope, based on the evidence that he provided on 19 December, that he has rectified part of that.
Q156 Mark Pawsey: As business owners, how long are you going to give them to turn this business around?
Gary Lindsay: We are turning the business around. The capital investment we have made into the business is significant. I referenced some tenure that we have invested in businesses previously—one almost a decade, others 15 years, and others 10 years. This is very early in our Asda investment horizon at year three.
Blair Thompson: It is important to recognise co-owners. We co-own the business with the brothers; they are equal owners in the business.
Q157 Mark Pawsey: At some point you might say, “We have partners, and this business is not going in the direction we want it to go in.” You have already confirmed to us that the UK grocery market is one of the most competitive in the world, and it is one where there are new low-cost entrants. Aldi and Lidl are really shaking things up. Why have you gone with these partners rather than perhaps more established operators in this sector, who may have a better feel for what is going on, particularly in the large supermarket part of it? I accept the expertise in the convenience sector, but that is not currently Asda’s core business.
Gary Lindsay: We did reference this and I am happy to repeat it if it is helpful for the Committee, but there are definitely aspects of the core grocery strategy that are analogous to EG. It is also worth bearing in mind that Walmart is still a significant stakeholder in Asda. It looked to sell the business three or four years ago through a very sophisticated and reasonably long-winded process and marketed the business to a whole host of global investors. Alongside Mohsin and Zuber, we spent significant time with Walmart articulating and elaborating our growth strategy for the business. It was Walmart, and by extension the Walton family, that selected us as the eventual successful party.
Mark Pawsey: Mr Gullis wants to come in on the issue of fuel pricing.
Q158 Jonathan Gullis: Mr Lindsay, you were talking about making the business profitable and grow, pointing to the success of the EG Group and the work on the forecourts. We have a very big concern because Asda was pointed out as being a company that was not fully complying with the Competition and Markets Authority, and it was repeatedly identified as having effectively bumped the price up earlier than others, and that all the other supermarkets actually followed. How much involvement did TDR Capital have in Asda’s engagement with the CMA when it came to the investigation over fuel pricing, and what has been done since to ensure that the 5p cut given by the Government to fuel duty is actually being passed on to the forecourt? From what I can see, the strategy is for profit in the petrol side of things and not necessarily in the convenience store side of things.
Gary Lindsay: To support our customers through the cost of living crisis, we invested 25% of the Asda P&L—so profits reduced by 25% to support those customers through an incredibly tough time. With a business like Asda, you have to be careful where you start disaggregating profit and where you start allocating cost and profit. We are there to serve our customers across a whole host of different missions. Fuel is clearly one of them, and it is an important one, but there is a grocery basket and now there is a top-up shop component to that mission by virtue of the convenience strategy.
Q159 Jonathan Gullis: While I totally accept that you were putting money into the shop where the food was, which is admirable, Asda was found to be bumping up prices at the forecourt in order to make more money from the petrol crisis, when we saw prices near £2 a litre. Asda was pointed out by the Competition and Market Authority to be one of the leaders in bumping up the price, which led to other competitors doing the same. This meant people were being ripped off at the pump even though the Government at the time had offered a 5p cut in fuel duty and a freeze on inflationary increases as well. I am looking to understand why the strategy was to make more from fuel, if you were trying to do everything you could to help on the food side of things. Was that a conscious decision to balance the books?
Gary Lindsay: There was no particular strategy to bump up the price of fuel, or to make a larger profit on fuel, if that is the intimation. The strategic decision was to invest 25% of the P&L to support our customers through that timeframe. That value is very different per customer, clearly, depending on their shopping habits: how they engage with the business, what they purchase, and where they transact with the business. For the record, this notion that we were moving profit between fuel and food is wrong. This is an end-to-end business that you need to look at holistically, as you can run into some pretty severe traps in trying to allocate costs to different components of it.
Q160 Jonathan Gullis: Okay, so you were willing to pump up the fuel costs—as much as you say that, it was obvious, because the CMA has said that Asda was leading in trying to take the mick, essentially, at the pump with people during that time and failing to comply properly with the CMA. What review has been undertaken to ensure that, if the CMA come knocking again, it is not going to be pulling its hair out? The CMA came here, before Mr Issa spoke to this Committee, and was quite blunt about just how poor Asda was in engaging and providing necessary evidence. What has TDR Capital done to engage with the Issa brothers to make sure that this will not be repeated in future? It meant a lot of uncertainty and brand damage. Asda was always famous for being willing to be a loss leader at the pump to build loyalty with the customer and to bring people into the store.
As someone from Stoke-on-Trent, Kidsgrove and Talke, where there is a very large Asda in a retail park which a lot of people rely on, as well as a fuel court nearby that people also wish to use, how can I go back to my constituents, and others, and look them in the face and say Asda truly has their back?
Gary Lindsay: If you look at the Asda business—I believe Mr Issa has articulated this—we are incredibly competitive when it comes to price across the business, and not only fuel. When we look at different grocery baskets, Asda is a value brand. For us to sit here and comment on the competitive response of other players in the industry in a fuel segment where, by conventional measures, we have 8% or 9% market share, I think that is—
Q161 Chair: Given the CMA’s advice, what have you done as a shareholder to ensure that the business operators are compliant? That is the question.
Blair Thompson: Management was extremely sorry that the CMA believed that it was not co-operating. It felt that it was providing everything it needed to in a timely manner. Clearly, that is not what the CMA believed, and management have taken that on board. In follow-up responses to the CMA, it provided the information it needed.
It is important to remember that we are two of the seven members of the Asda board. The board took the comments made by the CMA in relation to its request for information extremely seriously. There was a briefing provided to the board to ensure that the shortfalls would be addressed, and it would not happen again.
Q162 Jonathan Gullis: We know that following the CMA report the Government announced a pump watch—something that I, Howard Cox of FairFuelUK and others have been campaigning for—which, at the moment, is a voluntary scheme. Can we get confirmation, as far as you are concerned, that all petrol stations partly owned by you and the Asda Group are complying and sharing forecourt prices?
Gary Lindsay: We are more than familiar, from our experience at EG Group, of operating in markets with similar setups. From an operational complexity perspective, from a provision of information—i.e. compliance— perspective, we are more than comfortable with that.
Q163 Jonathan Gullis: Can I get a letter to the Committee stating what percentage of forecourts are taking part in the scheme to share their prices publicly, so people can search in advance?
Blair Thompson: We will ask Asda to provide one.
Jonathan Gullis: Thank you.
Q164 Ian Lavery: Thank you, Chair. I want to talk briefly about the labour conditions and trust of the workforce at Asda. TDR Capital has 270,000 employees across its portfolio. I am just wondering if you are anti-trade union.
Gary Lindsay: Absolutely not, Mr Lavery. We take our engagement, our relationships and our partnership with colleagues and employees across all our portfolio incredibly seriously. Asda has four exceptional union relationships. It is something that the business invests a huge amount of time and effort in preserving and growing. Like any business, we could do better. It is an ongoing challenge, as is growth in any business, but to your question as to whether TDR Capital is anti-union, absolutely not.
Q165 Ian Lavery: I am probably focusing on Asda and the board of directors at Asda. For the first time in its history, there is a vote for strike action at Gosport. There is something sadly wrong somewhere. Correct me if I am wrong, but I think the GMB union wrote to you in March of last year—nearly a year ago—asking to meet with yourself and other directors and, as yet, it has not had any response. That is not really aligned to what you have said. Will you meet the GMB union?
Gary Lindsay: I want to be clear and not conflate—
Ian Lavery: I really want you to be clear.
Gary Lindsay: I want to be clear, Mr Lavery. From an Asda perspective, a business perspective, Asda regularly meets with the GMB. In fact, in December, in relation to Gosport specifically, having spoken to the business, I believe they met three times. Thankfully, there seems to be a constructive approach on both sides. They are now entering into conversations that, hopefully, will get to the right place with respect specifically to Gosport, but there is absolute engagement at the business level.
We as TDR Capital do not run the business. We sit on the board. We are two of seven board members in the business. I do not want to conflate what Asda does from a managerial perspective, how it engages and, ultimately, how it faces off against different stakeholders in the business in a day-to-day managerial capacity.
Q166 Ian Lavery: I am basically asking because you are a board member of Asda, as well as your position at TDR Capital. We have had representations to this Committee with regard to a number of issues. Before I get on to that, let me mention the issues in the stores with regard to health and safety, and a deterioration with regard to wage errors and with regard to industrial relations—a complete deterioration in the Asda stores and worsening conditions for workers in the Asda stores. Do you recognise that as commonplace?
Gary Lindsay: I do not recognise it as commonplace but am hugely respectful, grateful and thankful for that feedback. Similar to any business we own, we want to be at the forefront—we want to be best in class from a health and safety perspective and from a governance perspective. Those are two topics and areas that, from a TDR perspective, we take incredibly seriously.
Q167 Ian Lavery: So you would you not agree with some claims suggesting that the debt load to Asda has reflected badly on the workers in the stores.
Gary Lindsay: If we focus on colleagues, we have seen increased colleague engagement. We have seen an increase in pay and rewards. In the last two years, the business has increased remuneration to colleagues by between 16% and 18%. We have seen a growth in overall headcount from 140,000 to 151,000. I fully acknowledge and accept the feedback and comments but, as I said at the top of the session, colleagues are the lifeblood of any business we own. The investment strategy, the capital investment and so on is pretty irrelevant if colleagues are not engaged, motivated, and excited to come to work. That really is the bedrock of any business we own.
Q168 Ian Lavery: I can assure you, from the feedback we get—certainly that I get—that workers in Asda are not excited to be going to work every day because of the reasons I have outlined: issues with health and safety, issues with work errors and issues with industrial relations. I was refused, as a local MP, access to a site only last year. You wouldn’t think that would be right, would you? I actually shop there. I could get my groceries if I wanted, but I was refused access to discuss issues with staff. It is not very good, is it?
Gary Lindsay: Mr Lavery, I do not know the specifics of that particular incident, but I am more than happy to follow up with you privately afterwards.
Q169 Ian Lavery: Can I get on to Asda’s offshore ownership structures? We have had Asda in here a number of times—representatives you have made reference to—but it has proved to be very difficult. The GMB union has said that it is extremely difficult to obtain any form of clarity on the financial position of the business, and that is information which should be widely available. Does the private equity structure of Asda encourage major distrust between the workers and management?
Emma Gilks: Just to take a step back, I understand why the Committee has questions about the structure that it has in place. I want to clarify that, in terms of the transparency of that structure, Asda is fully compliant with the Walker guidelines, which is supposed to encourage knowledge about the way the private equity industry works, the way that private equity managers work, and their portfolio companies.
Asda publishes its full accounts on its website, which colleagues, workers, suppliers, and all stakeholders can access. From our perspective, we believe the business is extremely transparent. I understand why there are questions around the structure. There are a number of entities within the structure, and you reference offshore entities.
Q170 Chair: Three quarters of the corporate structure has its accounts in Jersey, which does not have the same accounting standards as accounts filed here.
Ian Lavery: We were shown the diagram of the whole business, and it was like a board of snakes and ladders. There were companies here, companies there—phantom companies, or they were calling themselves Phantom, if you can recall. It seems so bizarre. But you are saying that, because it is within the law, there is nothing at all we need to worry about. The question is: how can anybody seek clarity on the finances of a company with such a complex financial operation?
Emma Gilks: The Asda structure, for a business of its size and scale, is not unusual. We believe it is entirely appropriate. The number of holding entities that were put in place at the time of acquisition is a very usual thing to happen, and that is because there is a capital structure.
Q171 Chair: Just because it is usual does not mean it is good.
Emma Gilks: When you acquire a business, there are a number of sources of capital that come into play to fund that acquisition. Those sources necessitate a number of companies to be incorporated above the target that you are acquiring. That is because different stakeholders have different requirements.
In the case of Asda, all its external debt sits within UK-listed companies. All its financial information is available publicly on its website for colleagues, suppliers and customers to access. As I referenced, it is also part of the Walker guidelines.
I understand that to see a number of companies, and to see them located in certain areas, raises some questions, but I want to be extremely clear with the Committee that Asda is extremely transparent.
Gary Lindsay: I believe we will be changing the name of that entity from Phantom, for the record.
Chair: Extremely transparent is rather stretching it. Anything else, Mr Lavery?
Ian Lavery: No.
Q172 Chair: When we put the question as to why this extremely transparent structure has three quarters of its accounts listed in Jersey, where there is no accounting transparency, the answer was, “It is easier to break it up and sell it without paying stamp duty on the transaction.”
Emma Gilks: When you put together acquisition structures, there are a number of different considerations that you have to take into account, whether that be the size and scale of the business, the sources of funding that are coming into the business to acquire it, legal and regulatory requirements—
Q173 Chair: You would accept that accounting transparency standards in Jersey are different to here.
Emma Gilks: I do accept that.
Q174 Chair: Are they clearer or less clear?
Emma Gilks: I do accept that, but the—
Q175 Chair: Are they clearer or less clear?
Emma Gilks: I think it is harder to obtain Jersey company accounts than it is from UK Companies House.
Q176 Chair: Are they clearer or less clear?
Emma Gilks: In terms of the detailed accounting standards, I am probably not best placed to describe them, but I think that—
Q177 Chair: Then how can you assure the Committee that the accounting transparency we are looking for is there?
Emma Gilks: I think the Jersey accounting standards will be equivalent to the UK.
Q178 Chair: That is not true.
Emma Gilks: If I could go back to the question of Jersey, the reason Jersey was used within the structure was because, as part of the original sources of financing and the original transactions that were taking place—
Q179 Chair: Do you want to correct the record now, though, that accounting transparency in Jersey is not as clear as it is in the UK? I just want to give you that opportunity.
Blair Thompson: Clearly, if that is the information available to the Committee, we are not aware. We are not experts in the relative standards between Jersey and the UK.
Q180 Chair: So why have you set the structure up in this way if you are not experts in it?
Blair Thompson: The reason we put in place the Jersey structure, as Emma has tried to explain, and the Asda team on 19th tried to explain, was not a function of—we were not trying to select a jurisdiction which had different accounting standards.
Q181 Chair: Why was Jersey selected?
Blair Thompson: For the reason we have tried to explain: it is easier to undertake certain transactions in Jersey compared to the UK.
Q182 Chair: Transactions such as what?
Blair Thompson: Flexibility in the future. If you want to move assets between Jersey companies, it is easier than moving assets between UK companies.
Q183 Chair: If you want to sell out?
Blair Thompson: Ultimately, but the structure was not put in place with a view to how we would sell out, because it would be very difficult.
Q184 Chair: So you are inviting us to believe that you set the accounts up in Jersey not because it was easier to disguise some of the figures.
Blair Thompson: That was not a consideration at the forefront of our mind at the time, no.
Q185 Charlotte Nichols: I want to come back to this extreme transparency and Mr Lavery’s point about the extent to which a potential lack of transparency between Asda and its trade union representatives affects that working relationship. Having been a trade union officer myself before coming into Parliament, one of the really basic things that is done when going into a pay negotiation to determine what your ask is, is to be able to have a clear understanding of the performance of the business you are negotiating with. That is a straightforward thing, but for Asda, there is a £1.94 billion gap in Asda stores’ operating costs.
Responding to a similar gap in Bellis Finco PLC accounts, Asda stated that “operating expenses which are not disclosed in note 4 of the Consolidated Financial Statements comprise all the other overhead costs which a business the size and complexity of Asda incurs in order to run its business.” Do you think that that is a sufficient explanation for expenditure and proceeds of that size?
Gary Lindsay: The clarification and the explanation are even simpler. As Mr Gleeson articulated, under the accounting rules there is a certain amount of disclosure in the notes that we have to make.
Blair Thompson: In relation to specific items.
Gary Lindsay: Yes, that does not bridge to the accounts, which includes the fully loaded costs, as you referenced. Again, maybe in the vein of the entities named Phantom, from a disclosure perspective going forward we will look to disclose more information in relation to those cost line items. So when you are bridging—
Q186 Charlotte Nichols: That is not Phantom though, that is Bellis and Asda stores I am referencing there.
Gary Lindsay: No, I am sorry, I am saying in terms of feedback that we as TDR will take away from these sessions. Given our time again, we probably would not have named an entity Phantom, albeit it does not mean anything—it is pretty random.
Q187 Charlotte Nichols: It does mean something because it has a dictionary definition.
Gary Lindsay: There is an English dictionary definition that did not play into the decision by our advisers to name the entities Phantom. Again, similar to this disclosure point, that is another takeaway based on these sessions where, from a transparency perspective—although we are compliant with the accounting rules—fully bridging those expenses so when someone does the analysis that you have just done, it completely foots because, for the record, there is no hole in the accounts. It is purely accounting standards, which can be confusing.
Q188 Charlotte Nichols: In terms of extreme transparency, going forward, will TDR and Asda commit to greater transparency with its workplace representatives so that they can make determinations about what they are asking for, whether they are satisfied with Asda’s offer and what their view is about the quality of industrial relations between Asda and their workforce?
Gary Lindsay: Absolutely. Where there is a fundamental gap in information like the one you have just referenced, and there is a perfectly plausible explanation, yes, of course we will commit to that on a go-forward from a transparency perspective.
Blair Thompson: Because that is in everybody’s interests.
Gary Lindsay: Yes.
Blair Thompson: We want to work with the workforce, not against them.
Charlotte Nichols: I agree it is the bedrock of good industrial relations, so I am very glad to see that you have made that commitment going forward, and I am sure you will be held to that.
Chair: I am prepared to accept that you are not experts in the Jersey accounting law, but, for your information, accounts that are filed in Jersey or in Luxembourg cannot be sent for and inspected either by trade unions or indeed this Committee.
Q189 Mark Pawsey: I just want to come back to Michael Moore and some broader issues. I am sure you will understand our concern, which is that a deal that looked great a few years ago, now, in the face of higher interest rates and perhaps inflation, means that the business will be under more pressure. Mr Lindsay and Mr Thompson have attempted to reassure us on that.
I wanted to ask you something more general. When you came before the Treasury Committee in June 2022, you said, “We have been through a period of historically low interest rates and inflation, and one of the reasons why there has been a growing appetite to invest in these kinds of opportunities is that the returns that are generated have outperformed the public markets”. We are no longer in an era of low interest rates, and we have gone through a period of relatively high inflation. What impact has that had on your members?
Michael Moore: As with any business across the UK—indeed, globally—they have adapted to new economic conditions. It is essential that they do so. Earlier on, I was talking about the indebtedness of the businesses that private equity invests in. The actual leverage levels—they may not be collected at an industry-wide level, but for the largest portfolio companies owned in the United Kingdom, they are subject to the Private Equity Reporting Group’s reporting, and they can show that the levels have actually been declining. The leverage levels have been declining in recent times. When you look at PitchBook or other providers of information, they will highlight that, broadly speaking, the debt levels have been consistent since the financial crisis and are probably a bit lower than they were before the financial crisis.
If I may echo the point I made earlier to this Committee, this is an industry that has, over 40 years, worked its way through a number of different cycles, not least including the pandemic. During the pandemic, many of the businesses did what Mr Lindsay was referring to earlier on and put more capital into the businesses so that they would be able to make their way through it. So conditions are tougher. Nobody is denying that at all, but the nature of the way in which the debt is now provided into the industry has also changed significantly. If you go back to the great financial crisis era, it was mostly provided by some of the most obvious and famous names on the high street. They have retreated in some respects from that, but there are now a lot of private credit funds that are created with a view to being partners with private equity firms when they make their investments. They, like the private equity industry, are professional investors. They are engaged with institutional investors who put other elements of the capital into the fund, and between them, they take a very careful view of how their businesses are doing and how they can keep them focused on growth, notwithstanding difficult economic circumstances.
Q190 Mark Pawsey: So your members are less active now than they would have been two or three years ago.
Michael Moore: More active. It is an active ownership model.
Q191 Mark Pawsey: When you say active, are they making more acquisitions right now?
Michael Moore: Sorry, no, I was referencing their engagement with their portfolios on which they are much more active, but they are never passive investors. There has been a bit of a hiatus in overall deal levels in the past year, but that is true of the whole economy.
Q192 Mark Pawsey: Would the TDR deal with Asda have been less likely in today’s economic climate compared to the one when the transaction took place two or three years ago?
Michael Moore: If I may, I will resist being drawn into speculating on one particular investment but more broadly observe that there have been fewer deals done in recent times. Having said that, all private equity businesses raise funds from pension schemes, charitable foundations, endowments and the like. In the UK, 90% of that is international capital, and those—particularly the pension schemes and others—are looking for returns of capital over time. So this industry will look very energetically to get doing deals either to sell existing portfolio companies when they have come to the end of the period of ownership or to find new opportunities.
Q193 Mark Pawsey: I will put the question to Mr Lindsay and Mr Thompson: if the Asda opportunity came along today, with today’s level of interest rates and the level of inflation that we face today, compared to the situation that existed when you did the deal two or three years ago, would you still do it on the same terms?
Gary Lindsay: We would, yes.
Mark Pawsey: I thought you might say that. All right, thank you.
Q194 Chair: Mr Moore, you see the challenge. You have banks disinvesting from UK business. You have pension funds disinvesting from UK business. I think ownership of UK equities is now down to about 4% from UK pension funds. You have private equity stepping in to fill the gap, but you do not have the same kind of prudential management arrangements around private equity-backed businesses that bite on, for example, banks or pension funds. The exchange that we have had about some of the accounting challenges, notwithstanding the virtues of the Walker regime, just reveal that there is an opacity here that maximises, not minimises, risk.
Michael Moore: I am afraid I do not accept the characterisation. I would concede the complexity point; there is undoubtedly complexity. The opacity point is something that we can get to the bottom of with better explanations, and actually the structures—
Q195 Chair: This Committee cannot call accounts that are registered in Jersey. Here is a business that has three quarters of its businesses in the corporate structure of Asda registered in Jersey. We cannot get those accounts and neither can the trade unions.
Michael Moore: No, but in the consolidated accounts of the company that is reporting under its requirements, under the Walker guidelines elsewhere, all those accounts are consolidated. That is perfectly standard—
Q196 Chair: So the BVCA position is that accounting transparency is good enough to keep these investments safe.
Michael Moore: I hear your concerns and understand them. What I would seek to offer is the reassurance that when you look at a group of companies, so that readers of the accounts—people working in Asda, for example, their suppliers and interested parliamentarians—can have a look at it, all the information has been brought to bear in one place and the overall impact for the group as a whole can be seen and is set out in one place.
One of the critical things for us in the last 15 years has been to ensure that large privately owned businesses owned by private equity businesses are holding themselves to the same standards of transparency and disclosure as they would have had, were they still in the stock market.
Q197 Chair: We have had to organise hearings of the Business and Trade Committee to get to the bottom of Asda’s debt structure. That does not tell us that accounting transparency is in a good place in this country.
Michael Moore: If I may, the consolidated accounts within that structure give an awful lot of that information publicly. I appreciate that if you wish—as you have—to go into the individual businesses, you are asking for additional disclosure from that point of view, but each of those group accounts are audited at a consolidated level and have to reflect the underlying transactions of all those other businesses.
Q198 Chair: In this case, the consolidated accounts for Bellis Topco Ltd are in Jersey, and therefore, they are not accounts that we can access.
Michael Moore: Bellis Finco is available and shows all—
Q199 Chair: Bellis Topco is not.
Michael Moore: Bellis Topco, if I have this correct, is the investment holding business.
Emma Gilks: Yes, that is correct.
Chair: Okay. We may be in different positions, Michael, on whether the transparency is in a healthy place or not. Our fear as a Committee is that many of the risks that we saw back in 2007-08, when you had accounting behaviour that was not well understood by regulators, led to people taking bad decisions in the dark and that did not end well for the British economy. So we are concerned about whether there are further steps that could be taken to maximise accounting transparency and therefore de-risk UK business at a time when interest rates are going to be higher for longer. That is the point, but let me bring in Charlotte Nichols.
Q200 Charlotte Nichols: Thank you, Chair. Mr Moore, Mazars’ chief economist George Lagarias told this Committee, “Valuation is where it starts” when it comes to reform of private equity governance, with concerns about stale and misleading valuations backed by the recent report of the International Organisation of Securities Commissions. Given that potential reforms to valuation may be considered by the Financial Conduct Authority, what should be done to safeguard investors and the public against these risks?
Michael Moore: The questions that IOSCO or the FCA ask of our industry—in IOSCO’s case, that is not just in the UK—are ones that we are very happy to engage on, and we anticipate that at some point the FCA may do some formal consultation around these areas.
In terms of valuation, if I may, I will step back to the nature of the way in which investors invest in a private equity fund. The investment managers of the private equity firm raise capital that is placed in the fund, and they raise that capital from a range of different sources. As I said earlier, 90% of it across the industry in the UK is raised internationally—so it might be Ontario teachers, Texan teachers or the Canadian public sector workers’ schemes. There are elements of it here in the United Kingdom as well—local government pension schemes and university endowments. There are a range of different sources of capital, all professionally advised.
They enter into a long-term commitment to provide that capital for typically a 10-year period. These are closed funds, so there is no right for an individual to unilaterally declare that they wish to take their capital out. They then rely on the skill of the manager to deliver the growth in the fund which will give them the capital return that they want, and that goes back to the pension schemes to pay the pensions of retired teachers, retired rubbish collectors, whatever they may be, in different parts of the world.
The valuation piece in this is relatively straightforward, to this extent: when a business is acquired, it is done on the basic principle of a willing buyer and willing seller. There is a valuation that is locked in by the acquisition price. Similarly, when the business is sold and cash transfers, you have a clear position on the value of that business. We are not trading on a daily basis where you need valuations of businesses daily. It does not fit with the long-term model of all these investment periods that private equity firms have.
Having said that, through the process of a year, portfolio companies will have audits done on them, the fund will look at the valuations within them, and indeed, many funds are audited. Those are governed by an international set of guidelines run by IPEV that fixes things in relation to global accounting standards, whether they are those here in Europe or across in the United States. So as businesses are held through a period, the valuations are being checked and updated using commonly understood and agreed standards globally. Then, at the end of the process when the business is sold, there is a fix on the value.
Q201 Charlotte Nichols: So you do not believe, as Mr Lagarias does, that more needs to be done to safeguard investors and the public against the risk of stale and misleading valuations?
Michael Moore: I read his evidence with interest. Perhaps we are just starting from different places. Ultimately, in a closed fund situation, which is how our industry operates, you have valuations that are real and telling and influence whether the fund has performed to the level that was anticipated when the capital was committed. Those real-world valuations are ultimately what matters. The fact is that there are other valuations that go along through the period of ownership, and they are benchmarked to international accounting standards.
Q202 Charlotte Nichols: Thank you. TDR Capital has acted both as an owner and a major creditor to Asda throughout its acquisition. In your experience, is there a risk that private equity firms in this situation may seek to structure their debt in order to pay themselves first?
Michael Moore: I am not privy to the details of that particular transaction, or others. However, generally speaking, if you step back again and think of the institutional investors who are committing capital into a fund, they are then looking at the transactions that are done for individual portfolio companies, and they have to make sure that they will not be disadvantaged by the different equity and debt arrangements that are put into individual businesses.
The disclosure between the general partner in a fund, the investment manager of a private equity firm on the one hand, and the institutional investors or limited partners in those funds is at a very high level and is governed by contract. Again, these are highly sophisticated professional investors who will get the information they need so that they, or anybody else, are not put at a disadvantage, whether it is the employees or suppliers or any other stakeholders.
Q203 Douglas Chapman: I want to follow on from some of the Chair’s points on transparency. Mr Moore, you have suggested that a comprehensibility gap is part of the private equity situation that we experience and its role in the economy. You have also said today that the industry has been in place for 40 years, so why, after all that time, does such a gap still exist? What needs to be done to create a healthier relationship between the private equity side of the business, the policymakers, and the broader public? Many of us are taxpayers as well and might have a vested interest in your success, or certainly your failure.
Michael Moore: The industry has recognised over recent years, as it has grown in size and has become a more significant stakeholder in the UK economy on behalf of its investors, that scrutiny and transparency are key to that being acceptable not just to you, but to the people who work in the businesses that are owned by private equity, and countless others.
I described before the way in which the funds are put together and the fact that they are characterised by highly experienced professional investors globally. The private equity industry is a global phenomenon. In the UK, we host the largest hub of private capital expertise outside the United States of America. There are probably 140,000 people in the industry, including the advisers who work with it. It is big and significant.
Until recently, we did not even have those figures, and we had not regularly tracked how many jobs were involved in the businesses backed by the industry, so we are endeavouring to make sure that we are better understood.
Dare I say it—I am not sure if it is the appropriate moment to say this, Mr Byrne—we have encouraged individual Members of Parliament to go and visit businesses backed by private equity and venture capital in their constituencies, because you can then see at first hand the capital provided, the expertise that is brought to bear, the long-term perspective and critically, the ruthless relentless focus on growth, because that growth is important to the people who work in these businesses and the local communities. I recall that and know that from my own time in this place.
We have also improved what we share with the public. The Private Equity Reporting Group, which is an independent body that was set up in late 2007, oversees a set of disclosures which are designed to ensure that by taking a company off the public markets, or if it is a significant private-to-private transaction, you do not lose track of it. You are able to see what is happening.
The Walker guidelines are very actively looked at by people across the industry, and in the last year, we have done our best—hands up, I admit it was not always easy to find where these enhanced disclosures and reports were—to create a website where you can have one-click access to the 70 or so businesses that are subject to those disclosure requirements. I hope that helps everybody to get access to information they feel they should have, and it is equivalent to what they would have if it was a publicly owned company.
Q204 Douglas Chapman: In terms of public confidence, which is what I think many members in the Committee are concerned about, obviously we looked at Asda and we have had reports into the Post Office before, which is maybe not private equity—
Michael Moore: I would like to underline that point, if I may.
Douglas Chapman: But it is building up a picture of things being out of control and not as transparent as the public would want them to be. Tomorrow, we are again looking into freeports in England to try to assess how they are structured and what the public stake is in their future function. So there are lots of things that are high up in the public domain at the moment and there are questions being asked. I think your industry is part of that.
Would you suggest—in terms of the transparency that is required in meeting that comprehensibility gap—that this Government or any future Government should be thinking about legislation to encourage and to maybe force people in your industry to actually give information that would be of more value to the public and allow us to interrogate some of the accounts that you put forward in different forms? We have talked about Jersey, which just seems to be a difficult area to interpret as well.
Michael Moore: I understand everything that lies behind the concerns and the line of questioning. I would take a slightly different perspective, if you do not mind, on how much is already available. If you look at the case of the Asda consolidated accounts that are part of the Walker process at the moment, they have all the disclosures that are required in terms of who the owners are, what is going on there and the strategic overview that goes with that.
As you will see in the Tesco accounts, the Sainsbury’s accounts, or the Aldi accounts, they have section 172 disclosures which actually talk about how they deliver on the requirement in the Companies Act to look after a wider set of stakeholders than simply the shareholders. That was an important reform that came in back in 2006. From our perspective, where there are specific areas where more transparency is required, we are happy to lean into that conversation and engage in that constructively.
Full disclosure: I am a Scottish chartered accountant by professional background and spent a lot of the late ‘80s and early ‘90s doing audits and disclosure tests. I look at a modern set of accounts for our industry compared to what was back in the ‘90s, for example, and it is transformed; it is night and day. The problem, the comprehensibility point, is that you are now producing 200-page reports, sometimes. That is a lot of detail to go through and understand, but there has been no lack of engagement in delivering that detail from our industry. We recognise we have a broad range of stakeholders and that should be done.
We anticipated that post Carillion, which again was not a private equity business—there may be things that you are following up post Wilko—there were going to be some governance reforms introduced in companies’ legislation or otherwise. That has not come to pass, and it might be that that is an immediate priority after the election. In the meantime, we as the industry anticipate that the Private Equity Reporting Group will have to judge whether to refresh the guidelines and make sure the disclosures are there.
I have one last point on that, if I may. Alongside the individual companies producing very detailed reports that keep them at the FTSE 250 disclosure level, our members are also required to produce data, which is provided to EY, which looks at how the portfolio companies—at the moment, there are about 70—meet the criteria of Walker. What is their track record? Are they growing the profitability of the business? Are they growing the numbers of jobs? What are the debt levels within them?
If I may as a follow-up, Mr Byrne, I will provide you with some of those reports which I think will address that bigger-picture strategic issue about how the debt is going. I would say, and you can examine this in due course, that the strong track record of the industry is that it does support jobs growth, it does support profitability growth and, frankly, if it did not, TDR and others would not raise more funds from investors for the next series of acquisitions.
Q205 Douglas Chapman: My final point is about we are looking at as transparency in this set of questions. I am not denying that there have been successes in terms of deals that have been passed in the recent past. When you look back to the Treasury Committee in 2007, they cited a number of concerns about your industry: excessive leverage, conflicts of interest and information transparency. Again, I am just worried we do not have tough enough legislation or new legislation to actually help you be more transparent. Some 17 years have passed, and we are still asking the same kinds of questions the Treasury Committee did in 2007. So what is going to change? Would you actually support additional legislation on the issue of transparency to help the public understand a bit more about what is happening in their own economy?
Michael Moore: I appreciate we have some way to go in persuading you that we are as transparent as we assert.
Q206 Douglas Chapman: I think you are moving to a no, aren’t you?
Michael Moore: No—I said earlier on, and I repeat the point, that I am very happy for us to engage with regulators, parliamentary Committees, legislators and Government more broadly on all this. We have a good story to tell in terms of the way we have adapted our disclosure and, indeed, how disclosure and transparency has increased for all sorts of businesses over time. We recognise that it really matters, so we will engage in that constructively.
Q207 Chair: Thank you. Just a couple of things to round us out. Let me just bottom out this question on Jersey. From your point of view, the virtue of establishing in Jersey is primarily that it is easier to consolidate investment funds globally, or is it actually about the ease with which you can, for example, sell firms on in due course?
Blair Thompson: The latter.
Q208 Chair: It is the latter. What is the stamp duty on those transactions?
Blair Thompson: It is a benefit which would flow to the purchaser, not to the current owners of the business.
Q209 Chair: And the stamp duty is zero, I believe.
Blair Thompson: Yes.
Q210 Chair: Yes. Okay, so registering in Jersey makes things easier to sell on in due course.
Blair Thompson: The purchaser gets a benefit from not having to pay stamp duty. Correct.
Q211 Chair: Finally, in terms of Asda itself, what you have heard from the Committee is a concern that new costs of debt service and new costs of lease service are creating a debt treadmill that has consequences relating to, for example, fuel prices and short-changing health and safety. Do you want to just put our minds at rest on that concern?
Gary Lindsay: Yes, and thank you for the opportunity. To summarise, as TDR Capital and as the board of Asda, we are incredibly supportive of the business. We do not take the responsibility of owning Asda—such an iconic British brand—lightly. A huge part of the agenda is growing the business because, as we touched on previously in the session, the business was not being run for growth prior to our ownership. From a balance sheet perspective and a leverage perspective, we are more than comfortable that Asda can meet all its future obligations, not just on the growth side, but on the balance sheet side on a go-forward basis.
Q212 Ian Lavery: It is really interesting to hear your commitment towards Asda and the customers. There still seems to be a lack of commitment towards the people who produce the wealth: the workers in the supermarkets and the warehouses and so on. Bearing in mind what is being discussed today, and there has been a vote for strike action at Gosport which will start on Friday and run for a couple of weeks and perhaps more than that, there is obviously a deterioration in industrial relations. Can I ask you a simple question, Mr Lindsay? Are you prepared? Will you give a commitment to this Committee that you will meet with the GMB union to discuss the outlying issues?
Gary Lindsay: As a direct consequence of this session, we will, in the first instance, follow up with the Asda business. Again, there may be a slight perception that we are more involved in the day-to-day of the business than we are.
Q213 Ian Lavery: You have an influence on it, don’t you?
Gary Lindsay: Of course, we sit on the board and we opine on a number of different matters. To your point, clearly any discourse between any stakeholder in any business we own is an issue and is something that we take incredibly seriously, so I will give you that commitment. I will personally follow up on that issue.
Ian Lavery: Thank you.
Chair: I am genuinely grateful to you all for your time today. You have really helped us understand this issue a lot better. When you have an industry that is employing 10% of the British workforce, when you have an industry that is a global leader like this, it is absolutely vital to the future of our economy that the industry succeeds. So thank you very much for helping us understand some issues better. That concludes our session today.