’Best-ever’ buyout deal may force tax change

The IPO of Japanese bank Shinsei meant a windfall for its Ripplewood-led private equity investors, but the exploitation of a tax loophole has caused controversy.

As private equity investors count their riches following the lucrative IPO of Japanese bank Shinsei, critics are questioning Japanese tax laws that helped the deal become such a success.

Shareholders in Shinsei – including US private equity firm Ripplewood Holdings, Deutsche Bank and General Electric Co – sold a 33 percent stake in the bank for Y231 billion ($2.1 billion; €1.7 billion) in an initial public offering on the Tokyo Stock Exchange on February 9.

The Ripplewood-led group bought Shinsei -then called Long-Term Credit Bank of Japan – in 2000 for Y121 billion ($1.2 billion). Shinsei’s market value since the IPO has risen to around Y1.1 trillion (€8.1 billion; $10.1 billion). The private equity group still retains a two-thirds stake in the bank worth roughly $6.63 billion. 

Bloomberg News, in a report published today, quoted The Carlyle Group co-founder David Rubinstein as saying Shinsei “may be the most profitable private equity deal of all time.'

The deal is likely to renew interest in the Japanese private equity market, which has long been viewed as promising but challenging by international investors.

But the deal has also created controversy in Japan, where the consortium is seen to have benefited from the rescue of the bank by public funds. Just before Shinsei was acquired in March 2000, the Japanese Government pumped in Y7.86 trillion (€58.2 billion; $72.1 billion) of taxpayers’ money to mop up the bank’s bad loans.

The issue would not be so delicate had the Government been able to recoup some of the cash through the levy of a capital gains tax charge. However, the consortium acquired Shinsei through a vehicle headquartered in the Netherlands, which allowed it to avoid capital gains tax on the sale of its shares.

According to the Financial Times, the embarrassment caused by this has prompted the Japanese Ministry of Finance to open talks with the Dutch Government in an attempt to close the tax loophole in the specific case of companies that have received public funding. Japan has already reached such an agreement with the US Government.  

If the talks do result in the tax legislation being changed, there could yet be implications for the private equity consortium that acquired Shinsei. Under stock exchange rules, it was forbidden from selling half its stake for 180 days from the date of the listing. Tax experts believe that the tax change under discussion could come into effect before the remainder of the stake is sold – reducing the potential return by 30 percent.