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Thursday 20 November 2008

Not a scandal but a textbook success

Ross Butler says MPs’ criticisms of the sell-off of theformer Defence Research Agency are financially naive

These gains must be viewed in context: first, the incentive package was more or less standard for a private-equity deal; indeed, it was more equitable than is often the case, since it was offered to all QinetiQ employees. To benefit fully, managers had to achieve a market-standard performance hurdle of 8 per cent compound growth per annum. At the time, that prospect looked remote and many QinetiQ employees failed to take up the offer. The managers effectively had to transform the business: making them put their own cash on the line in return for huge rewards if they perform is a standard private-equity tactic, aligning management incentives with potential rewards for shareholders. The only difference is that in this case it was the government, as majority shareholder, that was the main beneficiary.

But the MPs could not let the subject rest. Chisholm has been accused of manipulating the 2003 sale to line his own pockets — an accusation that anyone who understands the management’s role in a large-scale corporate auction process will find absurd. Chisholm might not be quite the visionary entrepreneur he sees in the mirror, but his success in transforming QinetiQ from a rag-bag of MoD research labs into a highly profitable global business has been met with undue cynicism.

The real issue is that he and the Carlyle Group are guilty of vastly overdelivering — something politicians are so unused to that they assume the assets concerned must have been undersold. And perhaps the government’s need for a scapegoat underscores its embarrassment at having made money off the back of private equity — a sector it has done so much to encourage us to hate over recent years. ‘Carlyle are private equity people,’ said Committee member Austin Mitchell MP. ‘We’re taught not to love private equity in the Labour party.’ It would have been preferable, no doubt, had QinetiQ made an unspectacular lurch on to the public markets and into relative anonymity. No big returns, no millionaires, no need for an inquiry. Next time, that’s probably what will happen.

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