Hugh Lenon's Speech at Mergermarket

Ladies and Gentlemen, good morning, I am Hugh Lenon, a Managing Partner at Phoenix Equity Partners, and the BVCA Chairman. It is my pleasure to open what I'm sure will be a thought provoking forum. The keynote speeches and diverse panel sessions that lie ahead for the rest of the day will, I am sure, provide food for thought, and hopefully prompt open and frank discussion.

Let me thank at the outset today's sponsors, PwC and Cuatrecasas Goncalves Pereira for their support. And on an administrative note, I have been asked to request if any journalists here today wish to use speaker quotes they should seek approval from speakers - thereby allowing free flowing debate. Thank you. 

In my role as BVCA Chairman - representing some 223 full members and 200 or so associate members - I have had the honour of addressing one or two audiences  such as this, but have noticed that there is a tendency, at these events, to focus on the negatives. Undoubtedly, the industry faces huge challenges - many of which you will hear about today. Quite apart from the turmoil in Europe and the question mark over the Euro itself - see today's papers - we have The Alternative Investment Fund Managers Directive - now a reality; and taxes under the new coalition government will inevitably have to rise as the government remains committed to urgent deficit reduction.  Gordon Brown forsook Prudence for the sweeter temptations of Mistress Profligacy - and now we all have to pick up the tab. Fact.

The investment activity statistics released by the BVCA last week also make salutary reading. Last year just £7.5bn was invested by BVCA members worldwide - this is in contrast to the £20bn invested in 2008 and the lofty £31.6bn during the boom of 2007.  Fundraising statistics also offer little relief. Under £3bn was raised last year - a staggering fall off from the £23bn that was raised in 08.

However - and it may be the natural optimist in me - has the industry, I ask,  now turned a corner? The amount invested by private equity firms in the UK during Q1 of this year exceeds the amount recorded in the whole of 2009.  So are things really looking up or have we witnessed a false dawn? Susan Flynn's 9.15 session will no doubt shed more light on this question.

Whatever the answer, I hope that today will nevertheless give everyone an opportunity to highlight, and indeed celebrate, some of our industry's recent successes, of which I know there have been many. Let us not forget that a mere 18 months ago the Boston Consulting Group declared - to much of the medias' delight- that as many as 40% of buyout firms would cease to exist. Yes, there have been casualties, and there will be more. But, as Mark Twain said, reports of our death have been grossly exaggerated.

There have been some terrific success stories- for example, Boot's has just become only the third British retailer to record profits of over £1bn.  And, at the other end of the size spectrum, take another private equity backed company that some of you will be familiar with - Streetcar: the company whose website you can log onto, hire a car in a matter of minutes, and often walk to collect a matter of yards away. In April, this was acquired by its larger US counterpart Zipcar, in a £32m deal. Now this is by no means the largest sum of money when compared to the mega deals of years gone by, but it's a perfect example of what private equity and venture capital can do. Smedvig Capital invested £6.4m of growth capital in early 2007. Streetcar saw its revenues increase 20-fold over the next three years. It is the largest company of its type in the UK and enjoys an 85% market share in London. On exit, Smedvig bagged a healthy profit - and quite right too. Unfortunately, really positive stories like these rarely receive much coverage across the business pages.

So, one of the areas I am addressing during my tenure as chairman is media perception. It is incumbent upon all of us in the private equity and venture capital industry to spread the word. To combat negativity, we need an armoury of positivity. To a degree - but only to a degree -  the statistics speak for themselves. Last week the BVCA published its annual performance measurement survey, which found that the 10 year return for private equity and venture capital stood at 13.1% per annum  against 3.1% per annum for total pension fund assets and 1.2% for the FTSE all-share index.

However, it is clear to me that repeating statistics such as these will never be enough to win over the many sceptics. Half the world call us  pests - and, as you know, some have likened us to locusts. To help win them over we must change the language we use.Our language matters when explaining what we do. We cannot just talk about splendid EBITDA growth and high IRRs. Language such as this simply does not resonate with the public, with politicians of any persuasion, nor with the press or the unions. Instead, I think we need to talk about sustainability. Talk about building sustainable businesses - ones which are built to last in the long term generating returns for us but, as importantly, for those who buy the businesses that we sell. Yes, sometimes building a sustainable business means cutting jobs. Often it means adding jobs. Usually it means doing both. The former, however, attracts attention whereas the latter might occur over several years and go completely unnoticed.  So let's talk about building sustainable businesses and, critically, illustrate what we mean by reference to some of our great case studies - like Streetcar. Tell the private equity story; educate the audience; don't just trot out the statistics.

Another challenge of my Chairmanship has been and will continue to be the threat - indeed the reality - of more regulation. I guess I have to mention the  Directive - about which many of you will have heard too much already.

Whilst we reached a critical juncture last week in Brussels, the endgame has yet to be played out. In the coming weeks the European Council, the Commission and the Parliament will seek to hammer out an agreed text. It is critical that our industry remains engaged.  Aspects of the Parliament's text,  particularly with regards to disclosure, and the Council's text with regards to the third country rules, might severely damage our industry. So, the BVCA will continue to engage vigorously with the new coalition government and officials across the EU.

Domestically, we also have come through an extraordinary period of change over the last 6 or 7 weeks. As you will all be too aware, the coalition agreement have singled out capital gains tax as likely to increase.  Yesterday's Queen's speech underscored this resolve. Whilst I have serious doubts as to whether any increase in CGT will produce enhanced revenues - CGT take actually fell by 53% in 2007 when the CGT rate was last raised - it would be politically naive to think that change is avoidable. However, in policy detail is everything. The BVCA, in advance of the emergency budget due on June 22, will therefore intensively focus its activities on ensuring that a robust distinction is drawn between the likes of second homes and speculating in the art market on the one hand, and, on the other, real investment and real backing for entrepreneurs of the sort in which private equity and venture capital engages.

In conclusion, today's agenda poses questions of great relevance to our industry as it enters, goes through, and ultimately emerges from what I suspect will be an era of enormous change. I asked earlier if our industry had now turned the corner. Perhaps, but what's round the corner, and will we like what we find there?

What does the future hold? Are we an industry best with overcapacity? Or not? I talked about our 223 UK PE firms. Why is it 223? Why not 23? Or 323? And how can we replicate the genuinely great returns of the past 10 years?

Exactly what change will look like I do not know, but there will be change and with it winners and probably some losers. In our industry's proven ability to adapt and thrive, however, I have complete confidence.

Portfolio management/value creation/today's deal making landscape/the debt markets - these pertinent topics and more comprise today's excellent agenda. I do hope you enjoy the day. Thank you.