Executive summary - Udo Bullmann

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Corporate governance provisionsLong-term investors should be rewarded. This can be done by permitting weighting of votingrights according to duration of shareholding and by means of differentiated taxation of (capitaland dividend) income from shareholdings. Golden employee-owned shares are also an option tobe further examined. Minimum holding periods to be eligible for tax exemption should beconsidered.In order to prevent value extraction, limitations on the withdrawal of liquid assets from thetarget company should be introduced. In particular the financing of dividend payouts via theimposition of additional debt on the company’s assets (leveraged recap) must be stopped. Mostcountries have rules here and we should propose a Moratorium on loosening of such rules. TheCommission should to undertake a comparative study of their effectiveness and propose EU-wideminimum standards.One could also imagine restricting owners’ freedom to set managers remuneration packages(stock-options) autonomously. At the very least an EU-wide code of good conduct should bedrawn up to ensure that managerial interests are best aligned with the long-term interests of thecompany.Capital maintenance provisions prescribing a limitation on the transfer of debts to companiesthat are the object of investments, through the restriction of credit financing, is a way ofchannelling investment in the right direction. In this regard one has to examine the taxdeductibility of interest payments that ‘subsidise’ the use of debt over equity. The Commissionshould undertake a study to assess whether these issues should be tackled on an EU basis or anational basis.We can consider the introduction at European level of some regulatory quantitative orprinciple-based constraint to the alternative investments exposure of pension funds. Suchconstraints in absolute terms could be meaningful especially in the case of the PE funds given thelow level of liquidity (scarcely considered as a major risk by the industry practitioners) of suchfinancial instruments.Consulting fees paid out of the cash flow of the firm should be limited to a certain percentage(varying with the amount of the deal). Fees exceeding this upper limit should not beacknowledged as ‘costs’ for tax purposes.Social rightsThe Transfers of Undertakings Directive 77/187 of 1977 (ARD) should be revised so thattransfers of undertakings achieved through transfers of shares were covered. These purelyfinancial dealings with a direct impact on workers could fall under the ARD and be subject to therequirements of prior disclosure of all relevant information to employee representatives, priorconsultation with employee representatives, and protection of the individual employees affected:in other words, no transfer of risk to employees. It would mean defending and extending theexisting national systems of co-determination and worker participation. In particular, issues oftake-overs and leveraging should be incorporated in the substantive fields where workers’representatives already have information or consultation rights.
Tax policyA uniform progressive capital gains tax rate should be applied in all member states. Theprogressive rate should be very high for short-term arbitrage deals to discourage the short-termbuying and selling of firms on the market for corporate control. Taxes should be paid in thecountry where the object of the transaction is located.Rules should be introduced to limit deductions for expenditure on interest in the targetcompany, its holding companies and its subsidiary companies once the target company has beentaken over by one or more equity funds.The limitation could take the form of no deductions being allowed for interest expenditure bythe local holding companies that have been established to carry out the takeover, and removal ofthe deduction for interest expenditure by the target company in respect of interest on the debtincurred in order to pay an extraordinary dividend after the company has been taken over byequity funds.In order to prevent the crass over-exploitation of tax saving opportunities, one can imagine, forexample, putting limits on how much one is allowed to lend a company (the rules on “thincapitalisation”) and it is possible to set limits on how much of the company’s money may betransferred abroad through exorbitant consultancy fees or exaggerated interest payments on thecompany’s debt (the transfer pricing rules).Table 1. Sources of capital(% of total)1996 2005Individuals 62 44Funds of funds 16 30Pension funds 5 12Corporations and financial institutions 10 7Endowments and foundations 7 7Hennesse Group LLC, IFSL estimatesTable 2. Assets under management by investment objective(% of total)Investment objectives June 2002 June 2005Long short equity 42.6 30.6Global macro 9.3 9.7Emerging markets 3.4 4.9Managed Future 3.2 4.3Dedicated short bias 0.3 0.2Total directional 58.8 49.7Fixed income arbitrage 5.7 7.9Equity market neutral 6.8 5.1Convertible arbitrage 8.6 3.9Total arbitrage 21.1 16.9Multi strategy 0.8 13.3Event Driven 19.4 20.1Source:TASS, Grail Partner’s analysis
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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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destabilising the financial markets
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& LBOs invest. It increases financi
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In particular, incumbent managers o
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long-term competitiveness of the ac
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It also leads to further weakening
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If HFs and LBOs have brought uncert
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the social responsibilities of comp
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areas after recapitalisation 11 . I
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Furthermore, the funds in many case
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privatised with a view to stimulati
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asset stripping, and the offering o
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dividend to Valentia.The second pub
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***The three country case studies o
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eturns well below those achieved by
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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
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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 152 and 153: clearly destructive must be prevent
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
Page 168 and 169: Alternative investment fund manager
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
Page 180 and 181: isks are honestly and clearly commu
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
Page 202 and 203: FRANS BONHOMME1. Company descriptio
Page 204 and 205: Friedrich Grohe AG1. Company descri
Page 206 and 207: 3. LBO exit (secondary LBO, IPO, li
Page 208 and 209: industrial sector level. A compromi
Page 210 and 211: Linde1. Company descriptionLinde is
Page 212 and 213: 2.5 Protection of minority sharehol
Page 214 and 215: marketing outside Germany and to bo
Page 216 and 217: 2.3 Effects on job creation, invest
Page 218 and 219: Peguform1. Company descriptionThe h
Page 220 and 221: PICARD1. Company descriptionPicard
Page 222 and 223: STORK1. Company descriptionThe indu
Page 224 and 225: TDC1. Company descriptionTDC is the
Page 226 and 227: TELECOM ITALIA GROUP1. Company desc
Page 228 and 229: 2.5 Corporate governance and econom
Page 230 and 231: 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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