Private Equity Under Fire
Private equity has waved the white flag on tax reform. But will it be enough to mollify its critics?
The confrontation between five golden princes of private equity and MPs on the Commons Treasury Select Committee had all the ingredients of a blockbuster. Only recently, the committee slaughtered the hapless head of their trade body so effectively that he had to resign straight afterwards.
With a meeting scheduled with the chiefs of mega-funds including KKR, Permira and 3i, a more equal match is promised – a clash between the power of capital and the rights of democracy, and free markets and tax fairness.
Yet the private equiteers were on the back-foot from the start. Far from presenting a unified front on such issues as tax treatment, the industry is in turmoil. When the Chancellor's aide, Sir Ronald Cohen made the case for reform, he was slammed as the enemy within.
Nevertheless, the writing was surely on the wall from the moment Cohen's fellow grandee, Nicholas Ferguson, pronounced that the buyout kings pay proportionally less tax than a cleaning lady.
Under the present system, much of the income executives make from deals is classed as capital gains, and is therefore eligible for taper relief. This rule was introduced to encourage investment in small start-ups, but in practice has meant that a handful of partners in private equity firms pay tax at just 10%.
The industry is preparing to wave the white flag on this point, in the hope of avoiding a more damaging backlash elsewhere, but devising new rules won't be easy. The conundrum lies in distinguishing between those using taper relief merely as a form of income-tax avoidance and genuine cases.
The danger is that the Government ends up throwing out the baby with the bathwater. By taxing the rich more, the Treasury will undoubtedly get a short-term boost to revenues, but if the effect is to discourage wealth creation, there will be a longer-term price to pay.
It would be characteristic but unwise of Gordon Brown to attempt to distinguish via the tax system between virtuous and non-virtuous private equity investments. But whatever the outcome of the tax debate, it is time the industry took the fight back to the unions and started arguing its wider case.
Private equity must now focus on explaining its merits. It is losing the argument on tax treatment, but a more organised and effective public defence of its valuable economic role could still avert an over-reaction.
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