Wednesday, 20 June 2007

Some sense into the Private Equity Debate

Not since the last time I watched Platoon have the letters "VC" been so disliked. There's been a lot of fuss about the 10% rate, so lets inject some sense into proceedings:

  • PE Houses make money, in general, by buying groups and selling them between 2 and 5 years later. They look to get a higher price than they initially paid, generally by more innovative financing but superincentivising management and staff. The "Slash and Burn" story is something of a myth, they only slash what needs it, there's no logic in destroying value in something you want to sell to an educated buyer
  • Most PE money comes from the US, and often tax exempts. So most of the gains aren't even taxed in the UK
  • The debt financing for PE funds is already subject to anti-avoidance legislation to prevent overgearing
  • The underlying investments on which the gains arise have already been subject to corporation tax anyway
  • Tax the VC managers too much and they will respond with 1 of 2 answers - either they move offshore, or they don't invest in the UK in the first place
  • Many staff and ordinary workers in successful PE deals have got large bonuses / rewards on such exits. Many management who did superwell, and certainly the ones the TaxCutter has met worked 24/7 . Why tax success just because someone had the innovation and bottle most of us lack. Lets face it, business is only successful when it gives the consumer, something the consumer wants
  • Too many big groups are over-bureaucratic and political. PE owned groups tend to be smaller and more business and customer focussed

Just remind me - who invented the 10% Business Asset Taper Relief rate? And who removed the tax credit on dividends so PE investment gives a higher post-tax return than investing in bog standard UK plcs? Lets see ... all these changes happened since 1997 .......

But as the "Private Equity funds taxed less than cleaners" quote says - shouldn't the real questions be why are low paid workers now caught up in Labour's income tax net - and what logic is there for taxing capital gains in the first place?

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