On 20 August 2007, the Senate Standing Committee on Economics ('Committee') delivered its report on the effects of private equity on capital markets and the Australian economy. 

The Committee, comprising three Liberal, one National, four Labor, one Democrat and one Family First Senator, found that a case for specific regulation of private equity had not been made out.

Terms of reference

The Committee assessed the following:

.        domestic and international trends concerning private equity and its effects on capital markets
 

.        whether private equity could become a matter of concern if ownership, debt/equity and risk profiles of Australian businesses were significantly altered


.         long term effects on government revenue
 

.        whether appropriate regulation or laws already apply to private equity acquisitions when the national economic or strategic interest is at stake and, if not, what those should be
 

.        appropriate regulatory or legislative response required, if any.

Evidence considered by the Committee

The Committee:

.        considered written submissions from 31 parties including Australian Venture Capital Association Limited, the Australian Bureau of Statistics, the Australian Manufacturing Workers' Union, finance and legal industry bodies, various companies, lawyers, accountants and academics

.        conducted three days of hearings, receiving evidence from several witnesses including the Deputy Governor of the Reserve Bank of Australia, the Deputy Chair of Australian Securities and Investments Commission ('ASIC'), the Executive General Manger of Australian Prudential Regulatory Authority and the Legal Counsel for the Australian Institute of Company Directors.

Committee's findings

Effect on capital markets

The Committee found that the effect of private equity on Australian capital markets is not likely to be significant, for the following reasons:

.        public company buyouts represent only about 1% of the total equity market
 

.        the number and value of large buyouts is likely to slow, due mainly to the:
 

.                                increased cost of debt; and
 

.                                falling equity earnings yields
 

.        the vast majority of businesses in Australia already have access to capital and proper management, and therefore have no need for private equity intervention
 

.        the main area of investment for institutional investors is likely to continue to be in listed companies, and this will limit the amount of funds available for investment in private equity
 

.        whilst private equity transactions may have an impact on debt markets by increasing supply of debt instruments, the debt market itself has a greater impact on private equity, through the cost of borrowing and the level of demand for debt instruments created from private equity deals.

Tax revenue implications

The Committee's view was that:

.        the impact of private equity activity on tax revenue is low, but overstated
 

.        whilst tax revenue might be affected by:
 

.                                increases in gearing; and
 

.                                shifting capital gains tax liability to parties who are not liable to pay it,

this loss in tax revenue may be offset by other factors

.        overall, there is insufficient information about how private equity activity will affect tax revenue.

The Committee noted that the Treasury and the Australian Tax Office were monitoring developments, including shifts to defensive gearing among companies that currently carry low levels of debt.

Need for further legislation

The Committee found that a case for specific regulation of private equity was not made out, for the following reasons:

.        foreign investment should generally be encouraged, and the Australian economy should not be protected from private equity
 

.        private equity re-invigorates underperforming public companies, benefiting Australian consumers, shareholders and workers
 

.        the current regulatory system, including the Corporations Act, various sector-specific legislation and foreign investment policy (including the Foreign Acquisitions and Takeovers Act), adequately protects Australian businesses and the Australian public from any potential dangers of private equity, including from undesirable foreign investment.

However, the Committee's view was that the private equity watching briefs maintained by the Reserve Bank, the Australian Competition and Consumer Commission, ASIC and the Foreign Investment Review Board should continue.

Dissenting views

The National Senator (Barnaby Joyce) and the Family First Senator (Steve Fielding) dissented from the Committee's findings.

Barnaby Joyce's view was that:

.        certain private equity investment structures allow foreign investors to avoid payment of tax
 

.        these structures are not available to Australian investors
 

.        such structures should not be allowed, as they disadvantage Australians in their own country.

Steve Fielding's view was that:

.        the highly geared nature of private equity transactions may result in lost revenue to the government
 

.        this would create an unfair tax burden on Australian families
 

.        further regulation should be considered in the interests of Australian families.

Conclusion

Private equity investment will continue to operate within the existing regulatory system, however the effects of private equity on the Australian economy and capital markets will continue to be monitored.