Executive summary - Udo Bullmann

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industrial policy, focusing on knowledge and information, and smart green growth. But, toachieve these objectives, long-term, patient investment is crucial.We still believe in the market but it must be a “social market economy”, not a “marketsociety”. This fundamental distinction was reiterated in the spring 2005 communication fromthe European Council, which quotes the draft vision for a European constitution of a “highlycompetitive social market economy”.The decisive question is - to what extent the growing sector of “alternative investmentfunds” - the hedge funds and private equity funds - conform and contribute to a positive,efficient and long-termist role for the capital markets in financing the enormous amount ofinvestment needed to make a “Europe of Excellence” in the real economy? Alternatively - towhat extent the activities of hedge funds and private equity funds are inimical to the widersocial interest, extracting rather than creating value, and leaving others in the society to pickup the cost?Answers could not be found in existing, actual information or analyses. Neither,unfortunately, can we expect answers from the European Commission.In July 2005 the European Commission launched a public debate on possible ways toenhance the European framework for investment funds. The Commission established a coupleof “Alternative Investment Expert Groups” to describe “how they see the future developmentof the hedge funds and private equity funds in Europe, and whether there are any Europeanlevelregulatory or other obstacles which hold back the efficient organisation of the businessin Europe”. But the purpose of the reports as described seems to presuppose that the majorproblem is too much existing regulation. In July 2006, the result of this work was publishedin two reports titled “Developing European Private Equity” and “Managing Servicing andMarketing Hedge Funds in Europe”.The PES-Group in the European Parliament welcomes that the European Commission hasdrawn attention to the alternative investment market in general and private equity funds andhedge funds in particular. However, the PES-Group is critical of the fact that the two reportshave been drafted by expert groups, mostly consisting of representatives of organisations witha strong interest in the “light touch regulation” of alternative investment markets, which bothreports duly proposed. Moreover, the PES-Group is deeply concerned by the strong bias inmany of the analyses of the reports. A bias towards deregulation is even more striking in thepolicy proposals derived from these analyses and the reports fail to address a number ofpivotal issues. This work - at the behest of Commissioner McCreevy - is in stark contrast tothe very well documented worries expressed in reports from among others the ECB, and theWorld Bank. The PES-Group first voiced its criticism in preliminary comments to theEuropean Commission’s two reports by the so-called “Alternative Investment ExpertGroups”.At the same time the PES Group took full account of the present lack of coherent analysisand reflections on how to tackle the new trends on the financial markets - in the interest ofour societies.***
Therefore, we decided to establish our own group of experts (henceforth referred to as PES-Experts - Reiner Hoffmann, Christen Amby, Giovanni Di Corato, Jeppe Jørgensen, MichelAglietta, Norbert Kluge, Pierre Bollon, Will Hutton, Paul Windolf, Andrew Watt, LotharKamp, Mick McAteer, Roland Köstler, Sam Ironside, William Melody, Norbert Wieczorek)and with them to analyse the situation and consider the need for regulation. The group hasnow finished “Capital funds in Europe - a critical analysis”, reflecting discussions during theperiod July – February 2006/2007.From the outset we insisted that this report should not be based on feelings or ourperspective but on facts and a very clear commitment to the future of Europe - the “Europe ofExcellence”, the New Social Europe, the Lisbon Process.Therefore, the report is based on a number of case studies from the real economy - todocument the strategies and the pattern of reactions followed by most private equity funds.Accessible studies, analyses, information and updates have been integrated into our work -supplemented by our own experts’ analysis.Our analyses have shown that some hedge funds and private equity funds contribute tomaking capital markets function more efficiently, to making some passive, corporate businessmanagers more pro-active and ensuring returns to investors, pension funds etc.However, overwhelming evidence and practical experience show that most of theiractivities raise serious concerns and problems in the real economy, e.g. the impact on longterminvestment in R&D, new technology etc. in co-operative businesses, jobs and workingconditions, investor protection and systemic risks to the stability of the financial markets.Finally, this report considers a number of tentative proposals that should provokediscussions on the objectives and form of future regulatory issues - incentives, codes ofconduct, monitoring, regulations - by member states as well as the European Union and otherinternational bodies.We deeply believe in a transparent, well-regulated market economy as the basis for thesocial economy in our welfare states and in the future global economy. But we also stronglybelieve that such regulatory measures have to be stronger than the “light touch regulation”proposed by the Alternative Investment Expert Group of the European Commission.Otherwise, we will simply weaken the future of our companies, industries and services, andthe capability to be at the front of the added value chain, which requires constant highinvestment in knowledge, research and advanced employment - more and better jobs. Andour Lisbon goal - “to become the most competitive and dynamic knowledge-driven economyin the world, capable of sustainable economic growth with more and better jobs and greatersocial cohesion” - will surely be under threat. There is a better way.Ieke van den BurgPoul Nyrup Rasmussen
Page 1 and 2: HEDGE FUNDSAND PRIVATE EQUITY -A CR
Page 3 and 4: The need for long-term investmentTh
Page 5 and 6: On the basis of a coherent analysis
Page 7 and 8: The pension fundsWhere does all the
Page 9 and 10: 3. The target company is merged wit
Page 11 and 12: Societies’ response - current nat
Page 13 and 14: In most of the case studies, PE inv
Page 15 and 16: huge tax advantages when the rate o
Page 17 and 18: known to bank supervisors. Those da
Page 19 and 20: provide transparency with respect t
Page 21: The demand for change and better re
Page 26 and 27: AcknowledgementsThis report has bec
Page 28 and 29: The situation we are facing now is
Page 30 and 31: market to promote the knowledge-eco
Page 32 and 33: Our desire to separate the single s
Page 34 and 35: Typically a single strategy HF oper
Page 36 and 37: In most European countries, fund ma
Page 38 and 39: It should also be signalled that:
Page 40 and 41: Institutional investorsCurrent and
Page 42 and 43: leverage in order to benefit from s
Page 44 and 45: 1.6 The costs, the management fees
Page 46 and 47: only remaining way to boost returns
Page 48 and 49: A majority of hedge funds have limi
Page 50 and 51: Our analysis is that these concerns
Page 52 and 53: Average annual returnsTremont HF in
Page 54 and 55: 1.11. Tendency of crowdingDespite t
Page 56 and 57: • Corporate governance:“In the
Page 58 and 59: Onshore FoHFsCountryUnitedKingdomGe
Page 60 and 61: ItalyBank ofItaly•Specializedasse
Page 62 and 63: 1.14 Societies’ response - curren
Page 64 and 65: Investments are often in individual
Page 66 and 67: employed 21 . Leverage effect expla
Page 68 and 69: Investments are sold off to other c
Page 70 and 71: Private Equity: European trends in
Page 72 and 73: time because of the longer holding
Page 74 and 75:
Bain CapitalPartners 74.7 9Thomas H
Page 76 and 77:
Sources of new funds raised (2005)C
Page 78 and 79:
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
Page 100 and 101:
- 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
Page 114 and 115:
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
Page 126 and 127:
***The three country case studies o
Page 128 and 129:
eturns well below those achieved by
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investment funds - in the UK alone
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4.2 The issue of pension fundsThe p
Page 134 and 135:
One year earlier the British Financ
Page 136 and 137:
the fund exceeds the highest value
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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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 152 and 153:
clearly destructive must be prevent
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European Union.Part III is going to
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2. Market transparency - a common i
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International Settlements in Switze
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3.2 The main beneficiaries of regul
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within jurisdictions with enhanced
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In our view, if we want to promote
Page 166 and 167:
investors.The EC should set up an i
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Alternative investment fund manager
Page 170 and 171:
widely differing impacts of PE acti
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estrict investment to specific asse
Page 174 and 175:
Clearly the governance authorities
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paid. There is therefore a need for
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5. Our immediate proposalsIn the pa
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isks are honestly and clearly commu
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Corporate governance provisionsLong
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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
Page 232 and 233:
Viterra1. Company descriptionViterr
Page 234 and 235:
Glossary 1Absolute returns: The ret
Page 236 and 237:
Hurdle rate: A rate of return that
Page 238:
Stock option: An individual's right
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