Magazine article Public Finance

Nothing Ventured. .

Magazine article Public Finance

Nothing Ventured. .

Article excerpt

The contentious world of private equity might seem a planet away from the public sector - but it isn't. In a range of services, including utilities, education, health, social care, leisure and support facilities, private equity-owned companies are not just contractors but owners of what used to be public assets.

This involvement ranges from the peripheral to the massive. On the small scale is local authorities' sale of their dilapidated assets to these companies, such as underused leisure centres to private equity-based leisure firm Esporta. At the very large end of the spectrum lies the privatisation of the former Defence Evaluation and Research Agency.

Six years ago, Dera was split in two. The largest part was privatised as Qinetiq, although the government retained 56% of the shares. A significant chunk of the equity was initially sold to US private equity firm Carlyle, which was chosen as the partner to prepare for Qinetiq's initial public offering. By the time Carlyle disposed of its remaining shares in February this year, it had turned a £42m investment into a £300m profit.

This type of return across UK industry has put private equity into the headlines and under the spotlight of the Commons Treasury select committee. The National Audit Office is also investigating the Dera privatisation, including the price of Carlyle's original holding, and will report later this year.

Now one of the most pressing tasks of Chancellor Alistair Darling is to decide whether to raise the tax levied on private equity partners. At present, those involved in one kind of private equity deal - leveraged buyouts - borrow most of the capital. The interest cost is tax exempt and partners also benefit from a very low rate of capital gains tax. As a result, the firms and their members can make millions of pounds in profits, yet pay little in tax.

There are, though, other types of private equity. Venture capital puts in the investments for start-ups, expansions and sell-offs - all of which can emerge from the public sector. Private equity - as distinct from a loan - is invested in exchange for a stake in the company. Some investors look for an exit in a year or two, while others are content to wait a decade or more.

Despite the recent crisis in the capital markets, there remains a large amount of private equity money awaiting further speculative investment. Labour MP and private equity critic David Taylor suggested to Public Finance that there could be £200bn available to buy further public sector and other assets.

Private equity has already grabbed a stronghold over what was once the preserve of the public sector. An example is Liberata, one of the UK's largest business process outsourcing companies, which is now 99% owned by US private equity house General Atlantic. Seventy per cent of Liberata's clients are in the public sector, including the Learning and Skills Council and the Ministry of Justice. Another customer is Sandwell Metropolitan Borough Council, where Liberata is working with BT to run the Transform Sandwell Partnership - a £300m, 15-year outsourcing contract.

Sandwell's Labour-controlled council says 500 council staff will be transferred to the new company on existing terms and conditions, and some 450 jobs might be generated through the use of a newly built operations centre to provide services for other clients. The contract will lead to improved support services and consequently better frontline service provision, the council says, which would have been unaffordable without an external partner.

Robert Gogel, chief executive of Liberata, told Public Finance: 'Typically the driving force [for outsourcing contracts] is to go out and get value for money.' He says its clients expect improved quality and lower costs by contracting out such services as tax collection, benefits payments and payroll, while benefiting from reliable and advanced IT systems.

According to Gogel, these objectives are made easier by having a private equity owner. …

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