Mid-market private equity firms are worried that tomorrow’s Treasury Select Committee meeting may result in knee-jerk tax changes designed to hit the mega-funds, which could have a devastating effect on the smaller end of the buyout market.
Practitioners believe that firms in the mid-market can more easily justify the tax treatment of their carried interest, due to the kind of companies they back and the nature of their business model. However, there are concerns that the large buyout firms, who will be the only ones represented before the committee, will have little incentive to defend the rest of the industry.
Tomorrow’s meeting will see representatives from five firms at the larger end of the buyout spectrum – Kohlberg Kravis Roberts, The Blackstone Group, Permira, The Carlyle Group and 3i – quizzed by the committee MPs. Questions are likely to centre around the tax break on carried interest, an issue which trade body the BVCA proved unable to defend at last week’s meeting. However, there will be no representation of the UK mid-market – who arguably have the most to lose from any changes to the regime.
Philip Buscombe, chief executive of Lyceum Capital, said: “Venture and small buyout firms need to have their voice heard more than it has been to date, because this will hit our part of the market harder than any other. This debate has been politically inspired by issues with the larger funds – but paradoxically any changes will hit small firms hardest. Lots of the big firms are multinational operations; if there are changes, they can move their base and re-organise their affairs – they don’t need to be headquartered in the UK like we do.”
Another mid-market GP said the larger firms were operating in a different sphere. “The criticisms the bigger deals have attracted have been over restructuring, job cuts, off-shoring. The smaller businesses we invest in can’t pursue these routes quite so readily – it’s a completely different game.” “We’re backing a management team with a plan and working with them to realise it,” said another. “We’re not just taking a view on a particular sector or making a strategic acquisition, as you can do at the larger end.” As a result, the arguments over carry should be separate too, he said.
All seem united in the belief that changes could have a damaging effect. Ian Armitage, chief executive of HgCapital, said: “There’s a danger that changes made on the hoof could lead to another set of unintended consequences, and damage an important part of the economy.”
Buscombe believes it could also hamper the industry’s ability to attract talent. “Significant changes to the fiscal incentives will have an effect on our part of the market, both for our own firm and the managers we back. We’re taking a lot of risk – managers won’t come and run or help to build smaller companies if the fiscal incentives worsen.”
Armitage thinks that if a change must be made, the simplest and most productive solution would be to create a low flat rate of capital gains tax, perhaps around the same 20 percent level as in Ireland – but then again: “no change is better than an ill-considered change.” The key focus, he believes, should be on resisting demands for increased regulation of the industry based on the “unfounded and deliberately inaccurate allegations” made by the trade unions in recent months.