Friday Letter So Osbourne loves venture

Britain’s new budget is kind to venture capitalists but buyout investors are not being wooed by government in the same way. They should be.

This week venture capitalists in Britain are celebrating a package of new reforms announced by Chancellor George Osborne in his annual budget speech—avowing more tax breaks for entrepreneurs and the angel and venture investors who back them. The intention is clear: like other nations the UK wants to foster the next Facebook or Google.

Meanwhile, large-cap private equity firms everywhere are still being treated by policymakers as the venture community’s mischievous cousins. Anxious to avoid a repeat of the global banking meltdown, politicians worldwide have hastily included buyout shops as part of their quest for greater financial reform. In the US regulators are currently seeking public comment on whether the buyout industry poses a systemic risk to the economy. US venture firms on the other hand have already been told that they will continue to benefit from a hands-off approach to SEC supervision.

Overworked regulators and the heavy burden of compliance costs are good reasons to exempt venture capital and smaller funds from overly cumbersome oversight. More importantly still, the UK’s new “Budget for Growth” is right to recognise venture capital as a driver of economic development.  To this end the British government has vowed to incentivise home-grown talent to start businesses, and separately has reworked visa rules to lure foreign entrepreneurs and investors to their shores.

However, the authors of the new budget are apparently less enamoured with the argument that late-stage investors, including buyout firms, can contribute economic value in their own right. While they have helpfully decided to slash the corporate tax rate from 28 percent to 23 percent over four years, one of the only other items for later stage investment professionals to cheer about was a £500 increase in the annual exemption threshold for individuals’ capital gains taxes.

Yet academic literature is rife with studies providing evidence that in the long-term the buyout industry creates jobs and leads to operational improvements in established businesses. One study, commissioned by the World Economic Forum in 2010, concludes “industries with private equity activity experience growth more rapidly (as measured by total production, value added and employment) and are no more volatile in the face of industry cycles than other industries”.

We don’t know whether George Osborne recognises this. He may do, but probably also sees no political upside in backing buyout funds. Late-stage private equity remains hardly a vote winner. Until this changes, you won’t find much that is positive being written about it in high-profile policy statements. Voters may like it that way. For the economy, it is lamentable.