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Senator Barnaby Joyce's Additional Comments
By
reason of conclusion 5.33 that the committee ‘does not consider that any
convincing case has been made for any further regulation of private equity
activity in Australia at this time’, I have to submit these additional
comments on these premises;
- Private
equity involvement in key sectors on the economy in a highly leveraged state
means that there is unreasonable stress placed on these sectors and the effect
of failure on an individual business has far wider ramifications than purely
just that business failing. These wider ramifications include adverse effects
on the economy; investor and shareholder confidence; and the stability of the
financial system generally.
- The
strategic and unfair advantage that private equity firms have over domestic
investors in regard to the construction of a taxation regime where capital
gains made by foreign private equity firms or investors are tax free has to be
addressed as Australians should not be disadvantaged when investing in their
own nation.
- As I
alluded to during the inquiry and prior to the share market turmoil, private
equity firms are inherently exposed to vagaries of cost of debt and are overly
reliant on capital gains via a share market re-listing. As I stated a major
correction is expected and this would put at risk those private equity
investments which are currently in progress.
- Private
equity should be defined as more than private investing. It should be defined
as the specific plan to take into private hands an organisation, often having
substantial market share within the economy, and in the process increasing
gearing substantially and with a three to five year plan of placing the
organisation back on the share market with the intention of receiving
substantial fees along the way and then a substantial tax free capital gain
upon re-listing.
- Because
the premise of private equity is not unusual, its capital gain is higher than
the price of debt. It is a plan that will work well no matter what gearing you
have as long as your cost of capital increases, or the under pinner of your
capacity to realise that capital gain is an active share market. A share
market is inherently made weaker if the substantial players and key sectors are
removed from it, or where there are interest rate rises, or a major correction
in the market. A major correction in the market generally is indicated when
the returns of the shares on the market do not match the returns on equity
inside the company. This triggers the correction and the ‘animal spirits’ of
day traders, chartist, margin calls, other derivative instruments and sub prime
debt financing players accelerate the downward plunge of any market direction
leaving investors and shareholders with substantial loses.
- Serious
questions must be asked of the conflicts of interests that are apparent between
a target board and a private equity firm. If there was one thing that stood
out beyond all others, it is that this conflict of interest completely breaches
the duty of stewardship that is expected by shareholders. The fact that some
listed shares of major Australian companies have, in a very short period of
time, exceeded the price of the private equity offer, yet the private equity
offer continued to be endorsed by a board, and management whose members were to
take an immense personal financial gain from the takeover, leave large
unresolved questions marks in the share market’s and public’s mind. This does
considerable harm to investor and shareholder confidence and, consequently, the
financial involvement of director and management of target companies in a
private equity bid should be prohibited outright in the best interests of those
investors and shareholders.
Recommendations:
- No structure of
investment, and in particular, no private equity investment should be allowed
that puts Australian domestic investors at a distinct disadvantage in their own
market
- Target company boards
and management should not be allowed to participate in any takeover bonus or
other financial incentives distributed by the private equity bidders.
- Private equity firms
that participate in key sectors of the economy should submit in confidence
reports, on a quarterly basis to the reserve bank and treasury, which contain
information that is equivalent to the requirements of a publicly listed
company.
- Private equity firms
should be quarantined from the domestic housing market as this manipulation
would be a distinct disadvantaged to the Australian homeowner as the market
pressures placed by multibillion dollar buyers against mum and dad investors is
intrinsically unfair.
Senator
Barnaby Joyce
The
Nationals
Senator
for Queensland
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