DFID to receive £70m private-equity profit

Andrew Mitchell Ex-Lazard banker Andrew Mitchell has extracted a surprisingly high return for UK taxpayers

Tactics described as a "shake down" are raising an estimated £70m for taxpayers from a private-equity fund that was originally owned by the government.

Andrew Mitchell, the International Development Secretary, will announce later today that he is selling the government's residual 40% stake in Actis, the world's leading emerging-markets private-equity fund, for $10m (£6.2m) in cash plus a large future share of what is known as carried interest in three funds.

This share of carried interest - or the profit that accrues to the funds' managers - is expected to generate more than $100m (£62m) for taxpayers.

It is striking and surprising that Mr Mitchell has been able to extract this return for taxpayers, because the government's share of Actis has been valued by its financial adviser, Hawkpoint, at between zero and $3m.

However it is understood that Mr Mitchell - a former banker at Lazard - threatened to use the government's residual shareholding to frustrate the smooth operation of the business. For example he has the right to veto the appointment of Actis's chair and one non-executive.

Last year, Actis's chief executive, Paul Fletcher, said that the government was engaged in "an entirely predictable game of shaking us down".

There was a public and media outcry when it emerged 15 months ago that the government had not received any payments at all from Actis, even though DFID was supposed to receive 80% of all profits, while the managers of the fund were said to have pocketed tens of millions of dollars.

At the time, Mr Mitchell told MPs that the way Actis had been privatised by the previous Labour government was "particularly shameful" for having seemingly allowed all the rewards from its success to be pocketed by managers, rather than taxpayers.

The International Development Select Committee said last March that it was "astonished to discover that…the taxpayer had not received any return".

Actis's managers paid £373,000 for 60% of the business in 2004. According to MPs on the Public Accounts Committee, the reason the government has received no payments from Actis since then is that "the remuneration paid to employees has absorbed all operating profits".

Mr Mitchell has estimated that the rewards to Actis's managers would be around $1bn over the estimated ten-year life of the firm's funds.

Under the new deal, DFID will receive 10% of the carried interest in two funds and 7.5% of a third fund - which its advisers Hawkpoint believe should generate more than $100m for taxpayers.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 1.

    $1bn over ten years to pay the staff, yet no dividends at all?

    Only worth up to $3m, but we bullied them into paying £70m?

    Sounds like the future relationship between the UK and businesses is being realised now. A pretty sight indeed.

  • rate this

    Comment number 2.

    'Shake down'? An interesting choice of words considering DFID was supposed to receive 80% of all profits and got nothing because the "remuneration paid to employees has absorbed all operating profits".

    Makes you wonder who was shaking down who because it looks like the tax payer has been thouroughly fleeced. I'd say Andrew Mitchell is just getting the taxpayer's shirt, arm and leg back.

  • rate this

    Comment number 3.

    "an entirely predictable game of shaking us down". such a nice term for extracting a justified ransom. Directors pocketing the proceeds of a privatisation organised by a Labour government - we have heard that before (Quintex?). This was very New Labour. A story where the Government benefits from the finance industry - unique?

  • rate this

    Comment number 4.

    It's an indication of just how corruptly we have been (and still are) governed. Shareholder revolts over the obscene greed of bosses is only part of the reaction.

    "Somehow it seemed as though the farm had grown richer without making the animals themselves any richer — except, of course, for the pigs and the dogs."

  • rate this

    Comment number 5.

    So excessive staff renumeration results in no money left for the owners. Consequently, despite the huge sums involved, the business is "worth" next to nothing.

    Ownership is totally subservient to control. Is that still capitalism? I can't see investors flocking to this new model.

    This is the direction large corporations are heading, with financials in the vanguard.


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