Executive summary - Udo Bullmann

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clearly destructive must be prevented.There is enormous potential for all of us in Europe in bringing our New Social Europe and theglobal economy together in a new dynamic interplay. But there is also a need for change toensure a sustainable New Social Europe in relation to the financial markets.In Part III we deal with the regulation issues: What to do?
PART III - Lessons to be drawn for future regulation1. The market cannot do it aloneIn the introduction to this report, we have defined the future long-term investment ambitions forthe European Union and its member states in the next decade:The New Social Europe and connected, smart, green growth strategiesThe need for long-term financing through efficient, low-cost, optimally functioning financemarkets is obvious. We have in the report analysed the latest development of the financial market- especially the hedge funds (HF) and one part of the private equity (PE) industry, Leverage BuyOuts (LBO).In part I we gave a comprehensive and thorough description of HF and PE-industries in Europe,based on the available facts and our case studies. It is a fast growing and increasingly dominantindustry in the financial markets. While one can argue for some positive effect on the market andpublic companies, the activities of HF and - especially LBOs - do have substantial negativeimplications for financial risks, the leverage of public companies, the need for long-termfinancing of real investment, R&D and jobs, the protection of investors etc. All in all, there seemto be contradictions and negative implications for the real economy in a number of cases -especially in the light of the agreed Lisbon goals and the PES group vision for a New SocialEurope.In part two, we had a close look at the consequences of HFs and PEFs’ (LBOs) have for somecentral issues in our real economies - and thereby for our Social Europe as a whole. It was shownthat the financial markets do not automatically respond in a subordinate and optimal way to thefinancial needs of long-term investments. Our case studies confirm the risks and negative impactson:• The economic viability of our private companies in Europe. Limitations on investmentcapability, employment, education and qualifications - innovation and globalcompetitiveness.• The working conditions and participation of employees in the target company.• The public sector, utilities• The pension funds of employees and the long-term real value of their investments• The stability of financial marketsThese contradictions, negative implications and obstacles in progressing towards a New SocialEurope will not automatically disappear. The problems will not be solved by natural changes onthe financial markets. Unless the societies and the EU intervene, these market imperfections willstay and probably grow.But if we in Europe - and hopefully globally - can regulate the financial markets to make themsubordinate to the real economy, without negative implications, there are enormous realeconomicopportunities ahead of us, for the future of the whole of Europe’s of population.That is why we need a new strategy for the financial markets in member states and the
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HEDGE FUNDSAND PRIVATE EQUITY -A CR
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The need for long-term investmentTh
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On the basis of a coherent analysis
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The pension fundsWhere does all the
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3. The target company is merged wit
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Societies’ response - current nat
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In most of the case studies, PE inv
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huge tax advantages when the rate o
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known to bank supervisors. Those da
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provide transparency with respect t
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The demand for change and better re
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industrial policy, focusing on know
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AcknowledgementsThis report has bec
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The situation we are facing now is
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market to promote the knowledge-eco
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Our desire to separate the single s
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Typically a single strategy HF oper
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In most European countries, fund ma
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It should also be signalled that:
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Institutional investorsCurrent and
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leverage in order to benefit from s
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1.6 The costs, the management fees
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only remaining way to boost returns
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A majority of hedge funds have limi
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Our analysis is that these concerns
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Average annual returnsTremont HF in
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1.11. Tendency of crowdingDespite t
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• Corporate governance:“In the
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Onshore FoHFsCountryUnitedKingdomGe
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ItalyBank ofItaly•Specializedasse
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1.14 Societies’ response - curren
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Investments are often in individual
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employed 21 . Leverage effect expla
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Investments are sold off to other c
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Private Equity: European trends in
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time because of the longer holding
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Bain CapitalPartners 74.7 9Thomas H
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Sources of new funds raised (2005)C
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The private equity manager virtuall
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The fund structuring arrangements f
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ownership transfers. But buyout cap
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equity value chain. The main areas
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of the table but that less mature c
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UCITS (Undertakings for Collective
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Article 49Within the framework of t
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open and secure retail markets and
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offeree company must give its views
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In its Communication on worker info
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est practices, promoting innovative
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- Work to ensure more consistent an
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Page 104 and 105: & LBOs invest. It increases financi
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Page 108 and 109: long-term competitiveness of the ac
Page 110 and 111: It also leads to further weakening
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Page 116 and 117: areas after recapitalisation 11 . I
Page 118 and 119: Furthermore, the funds in many case
Page 120 and 121: privatised with a view to stimulati
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Page 124 and 125: dividend to Valentia.The second pub
Page 126 and 127: ***The three country case studies o
Page 128 and 129: eturns well below those achieved by
Page 130 and 131: investment funds - in the UK alone
Page 132 and 133: 4.2 The issue of pension fundsThe p
Page 134 and 135: One year earlier the British Financ
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Page 138 and 139: 5.3 Short sellingHistorically, hedg
Page 140 and 141: global financial markets. In 1998 t
Page 142 and 143: implications associated with the li
Page 144 and 145: The classic source of leverage is l
Page 146 and 147: I talk to have got a prayer in the
Page 148 and 149: The main reason for the lack of inf
Page 150 and 151: 7. The need for change to ensure a
Page 154 and 155: European Union.Part III is going to
Page 156 and 157: 2. Market transparency - a common i
Page 158 and 159: International Settlements in Switze
Page 160 and 161: 3.2 The main beneficiaries of regul
Page 162 and 163: within jurisdictions with enhanced
Page 164 and 165: In our view, if we want to promote
Page 166 and 167: investors.The EC should set up an i
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Page 170 and 171: widely differing impacts of PE acti
Page 172 and 173: estrict investment to specific asse
Page 174 and 175: Clearly the governance authorities
Page 176 and 177: paid. There is therefore a need for
Page 178 and 179: 5. Our immediate proposalsIn the pa
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Page 182 and 183: Corporate governance provisionsLong
Page 184 and 185: ANNEX 1 - Case studiesANNEX 1 - Cas
Page 186 and 187: 1. Company description ............
Page 188 and 189: AA1. Company descriptionThe Automob
Page 190 and 191: Autoteile Unger1. Company descripti
Page 192 and 193: Bulgarian Telecommunications Compan
Page 194 and 195: Deutsche Börse1. Company descripti
Page 196 and 197: DIS1. Company descriptionThe DIS De
Page 198 and 199: DT-GROUP1. Company descriptionDT Gr
Page 200 and 201: (2005 €610m) resulting in an EBIT
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FRANS BONHOMME1. Company descriptio
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Friedrich Grohe AG1. Company descri
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3. LBO exit (secondary LBO, IPO, li
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industrial sector level. A compromi
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Linde1. Company descriptionLinde is
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2.5 Protection of minority sharehol
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marketing outside Germany and to bo
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2.3 Effects on job creation, invest
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Peguform1. Company descriptionThe h
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PICARD1. Company descriptionPicard
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STORK1. Company descriptionThe indu
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TDC1. Company descriptionTDC is the
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TELECOM ITALIA GROUP1. Company desc
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2.5 Corporate governance and econom
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same way like some institutional in
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Viterra1. Company descriptionViterr
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Glossary 1Absolute returns: The ret
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Hurdle rate: A rate of return that
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Stock option: An individual's right
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