In July, Australian private equity professionals received some good news: senior representatives from the Reserve Bank of Australia, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) declared at a Senate hearing that there was no need to further regulate the industry.
The statements were made partly in response to concerns about the tax treatment available to buyout firms in the country and their disclosure obligations, which commentators have described as wanting.
Local politicians had been critical of the industry, especially on the point about capital gains tax. Ahead of the hearing, senator Steve Fielding told local reporters: “The Reserve Bank of Australia doesn't know how much private equity is driving tax revenue loss for this Government. It's a huge tax black hole.” Fielding claimed that if Qantas, the country's national airline, had been taken over earlier this year, foreign private equity players could have received an exemption of A$1 billion ($860 million) in capital gains tax.
However, Ric Battellino, deputy governor of the Reserve Bank, said: “From our perspective, as a general macro picture, there's no cause for concern here.” Battellino played down the industry's potential effect on tax receipts, arguing that changes to how Australian businesses were being finance did not have a major impact on the country's overall tax base.
He also asked lawmakers to consider that the recent buyout boom would not continue indefinitely, particularly given the tightening credit markets. Leveraged buyout activity in Australia has been fuelled this year by benign economic conditions and investment banks offering cheap loans, he said.
Senators were also warned not to overstate the influence of private equity on economic activity in Australia in general. Private equity made up a relatively small component of the Australian capital markets, Jeremy Cooper, deputy chairman of ASiC, said.
He cited statistics saying private equity deals announced last year amounted to about A$26 billion, while $1.39 trillion was invested on the Australian Securities Exchange.
But Cooper also said that ?private equity is a recognised asset class around the world and it would be totally inappropriate if Australian investors were blocked out of that type of investment.?
Cooper also defended the level of scrutiny private equity firms receive. Buyout groups must show their annual results to ASIC, he pointed out. They were also being monitored by their lenders, while their investment performance was regularly audited by superannuation funds and other institutional investors, he added.
The Senate inquiry was aimed at identifying the ?dangers? of private equity to the Australian economy and business. It was launched after a number of high profile deals recently cast the limelight on the industry, which until 2006 operated very much below the radar in Australia. Things changed in 2006 when a handful of Australian corporate icons such as Myer department store and Qantas became takeover targets for private equity managers.
Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association (AVCAL), said: ?This inquiry was largely provoked by the Qantas scenario which ignited some pretty strong sentiment. That time is past and I feel the asset class is [now better] understood by politicians, the public and the media.?
The inquiry had been a catalyst for AVCAL to promote the industry, she said, adding that the Senate inquiry had reduced the ?economic xenophobia? provoked by the attempted takeover of the national airline.
A consortium comprising Macquarie, TPG, Allco and Onex had attempted to acquire Qantas earlier this year but abandoned plans in May after failing to secure the shareholder acceptance for its bid. The bid for the national carrier sparked mainstream media and political interest in the industry across Australia.