Editor's letter(2)

Given the intense level of scrutiny that private equity has been subject to over the past month, market participants are almost nostalgic for the good old days (that is, two or three months ago) when it seemed that private equity's perception problems had mainly to do with leverage ratios and job creation. Yet another huge issue that is suddenly on the agenda, both in Europe and North America, is tax.

In the UK, thanks in no small part to Nicholas Ferguson's comment that buyout executives should not be allowed to pay less tax than their cleaning ladies, a fierce debate broke out in June over whether carried interest should be taxed as income or capital gain.

In Germany, local general partners are despairing over the fact that after years of tinkering with fiscal law, the capital gains tax status of private equity funds is still uncertain – and are now facing the additional threat, made by the Ministry of Finance in June, that management fees paid to general partners based in Germany will soon be subject to VAT (see p. 58).

In the US, the very structure of the limited partnership is being challenged. A growing chorus of sceptics on Capitol Hill is saying that limited partnerships have been getting away with too much for too long. Most worrying to US GPs is a bill proposed last month in Congress that would more than double the tax on carried interest. That Congress has taken an interest in taxes payable on carry speaks volumes about the success of (big) private equity, most conspicuously in the form of the Blackstone IPO, one of the 10 largest IPOs in US history.

As a result of these developments, private equity is now facing massive challenges on both sides of the Atlantic. Many industry participants in Europe and North America are quietly conceding that a change for the worse to private equity's fiscal status is looking increasingly inevitable – and for the biggest funds would probably be appropriate anyway.

However, the real concern has got to be that private equity is now so widely seen as a force for evil. This is a travesty: contrary to popular belief, Western economies will not be better off if private equity as we know it is being legislated to pieces. Unfortunately, the current mess is in no small part self-inflicted and a direct result of private equity's refusal to explain itself to the outside world. At a time when legislators seem in danger of throwing the baby out with the bath water, GPs who so far have not explained to the world what they do need to get out there pretty sharpish.

Enjoy the issue – despite it all.

Philip Borel

philip.b@peimedia.com