On Tuesday, UK Labour Party leader Ed Miliband gave a speech at a party conference in Liverpool in which he painted the private equity industry as under-regulated “asset strippers”.
In his speech, Miliband – whose party's biggest backers include Nigel Doughty of Doughty Hanson and Apax Partners co-founder Sir Ronald Cohen – picked out Southern Cross, the UK care homes operator, as an example of a company destroyed by private equity ownership.“They may not have sold their own grandmothers to make a fast-buck, but they certainly sold yours,” said Miliband scathingly.
In an email response to the speech, Tim Hames of the British Private Equity and Venture Capital Association pointed out that it was a full five years since Southern Cross had been sold by its private equity owner, the Blackstone Group. “To hold that firm responsible for all that has happened there since then is as fair and reasonable as blaming Mr Miliband for everything that has happened to Britain since 2006.”
Miliband said that if elected to office, business will be taxed and regulated to support what he considers “wealth creators”. Referring to the “predators” of private equity, he continued: “They’ve been taxed the same, regulated the same, treated the same, celebrated the same. They won’t be by me.”
However for all his posturing, Miliband’s words are likely “an empty threat”, said one London-based financial services lawyer in an interview with Private Equity International. “Rules against asset stripping a company are already being handled at the EU level which in this instance supersedes UK law.”
An EU-wide directive covering the alternative assets markets (the Alternative Investment Fund Managers Directive) will limit GPs' ability to extract capital from a portfolio company in the first two years of ownership.
The Directive is currently undergoing consultation but EU member states are expected to work the Directive’s provisions into their own national frameworks by July 2013. Individual member states have “limited flexibility in implementing the Directive’s provisions into national law, but even so Millband may not see an election until May 2015 at the latest”, said a separate London lawyer.
On the tax front, Miliband would need the support of Parliament, said John Baldry, a tax-focused lawyer at Ropes & Gray. “This would likely need to be passed in an annual finance bill, if at all,” he added. As it stands, carry is taxed at the 28 percent capital gains tax rate in the UK. If instead treated as ordinary income, the tax burden could be as high as 50 percent. Similar tax changes are being discussed by the Obama administration in the US.
If successful in changing the tax treatment of carry, Miliband risks London losing its status as Europe’s private equity epicentre, said Baldry. “British firms have easy access to numerous business centres in Europe, so if they find tax rates too high in the UK, they will move elsewhere. This contrasts to the US where it is not so easy to relocate.”
Nicholas Donato contributed to this article.