Friday Letter Between a rock and a hard place

The balance between lobbying policymakers and spreading the private equity gospel is a tough one to strike.  

Financial journalists expect to have their inboxes inundated when governments make key tax announcements. So when the emails started flooding in last month with reactions to the UK’s 2011 budget announcement, it was no surprise to see one from the British Private Equity and Venture Capital Association (BVCA).

The BVCA applauded many pro-business measures in the budget – which UK chancellor George Osborne characterised as “unashamedly pro-growth” – including reforms to help small businesses attract and retain talent with tax advantaged share options. It also voiced support for the government’s decision to reduce the 50 percent personal income tax rate for people earning more than £150,000. “The 50p income tax rate has from the outset cost more in reputational harm for this country than it has raised or ever would raise in revenue,” Mark Florman, BVCA chief executive, said in the statement, arguing the reduction would “make Britain a more attractive location for international investment”.

This prompted debate in PEI’s London office. Not so much about whether reducing the rate to 45 percent would make a difference to investment levels or the UK’s reputation for high taxes.

Rather, the key talking point was whether the BVCA supporting the cut could be interpreted negatively by a public already dubious about tax rates paid by private equity professionals. After all, the carry tax debate is alive and kicking on both sides of the Atlantic. And the 50p rate reduction, regardless of whether it was a good or bad call, was sure to – and did – play badly in much of the UK press. The cut, coupled with a measure that will cap pensioners’ allowances, had headline writers framing the budget story around rich ‘winners’ versus elderly ‘losers’.

To be clear, the discussion here at PEI wasn’t really centred on the BVCA or its statement; it was about the difficulty all private equity trade bodies face in balancing their public policy advocacy and lobbying efforts. Should their priority be to make the industry’s case to policymakers, as their members presumably expect? Or should it be to improve perception of the industry more broadly, as members presumably also expect? Because there will be times, like this one, when these two priorities conflict.

Take the controversy over carry tax. If a trade body lobbies publicly for the tax to remain at a lower capital gains rate, ‘Main Street’ could see that lending credibility to the ‘fat cat’ stereotype industry groups continue to fight. In that scenario, would it be better for the organisation to refrain from making public statements – and keep lobbying (quietly) behind the scenes? Or is the answer more simply to attack on all fronts, and ramp up the reputation damage control at the same time as lobbying for pro-business measures that risk negative headlines?

Opinion was divided at PEI. But it’s clear this question of trade bodies needing to balance competing objectives is likely to become more acute as private equity becomes increasingly subject to public and regulatory scrutiny.