Private equity changes the rules

Private equity has burst on the national consciousness with a vengeance in the past couple of months. The sector has made an art form out of keeping its head down and when it was forced above the parapet it has been found sadly wanting.
Appearances before a hostile Treasury Select Committee were certainly not part of the plan and the leaders of the sector seem to have been ill-prepared for the political onslaught that has confronted them in recent weeks. The lack of political nous has already cost Peter Linthwaite the boss of the trade association – the British Venture Capital Association – his job and the sharp differences of opinion between the heads of the major private equity firms have played into the hands of those who believe that a harsher fiscal regime needs to be imposed on this sector.
Most of the rest of the financial services sector is quietly sitting on the sidelines thinking that this doesn’t have much to do with them and that the worse that can happen as the political debate heads towards its conclusion is that a few private equity fats cats get walloped with a big tax bill they can easily afford to pay. This could be a trifle naïve.
The nature of these political bandwagons is that they tend to roll; or, to mix metaphors and put it more starkly, once the Treasury Select Committee tastes blood it is not going to be inclined to let up the hunt. The question then becomes, what next?
The most immediate implication of any new tax regime will be that the complex market forces that surround the private equity sector will be realigned and the nature of such realignments is usually that there are some unexpected and unintended consequences. These will keep analysts and commentators very well employed over the next few months and will make high profile private equity deals just a little bit thinner on the ground – this could mean that inviting headlines about making the likes of Peter Cullum multi-billionaires won’t be top of the sector’s priorities. More interestingly for the rest of us is the thought of what next for those now reinvigorated in their hunt for “unjustified” tax breaks.
Where will their attention turn? Tax havens and tax exiles – whether corporate or individual – have never been popular with the left and many aspects of offshore domicile could easily come under harsh political scrutiny. This could have huge consequences for many insurance firms and fund management groups. It will certainly make it harder to argue for a generous approach to the problems caused by rapidly rising property prices and the need to review the scope of Inheritance Tax and Capital Gains Tax. The private equity row has decisively changed the political climate so that attempts to lift large numbers of people out of tax regimes they should never have been in will be closely scrutinised to see what extra advantages the so called super rich might also enjoy as a result.
So, as we watch the Treasury Select Committee's investigation unfold and smugly think that it has little to do with the rest of us, we might wan to think again.

In the interests of transparency I ought to point out that Incisive Media currently has private equity owners (Apax) and publishes for the private equity sector.

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