A rock and a hard place

According to a survey of 108 UK-based chief financial officers conducted by Deloitte, the greatest threat posed to UK business right now is uncertainty over post-election policy change. The second greatest risk is a referendum on EU membership.

“Uncertainty is not good for the economy or for business,” Endless co-founder Garry Wilson told PEI earlier this year. “I fear that the UK election will throw up a strange coalition government. And all that I’m hoping is that the election results in a clear result one way or the other so that business knows where it stands going forward.”

But as the UK General Election draws closer it seems any party winning an outright majority is becoming less and less likely.

“Instability is the most likely outcome of the election,” Better Capital founder Jon Moulton says, citing strong odds currently carried at British bookmakers against the likelihood of the election resulting in a single-party government. “We’re definitely into territory we don’t know, and we could have some truly ghastly amalgamations.”

One potential combination is a coalition between the Labour Party and the Scottish National Party. Such an outcome will almost certainly mean an end to many of the so-called austerity measures currently in place.

“That means more borrowing, which probably means a weaker sterling, [and] it may very well mean at some point some form of currency crisis,” Moulton says. “That’s probably a relatively weak economy to look forward to, and makes the sterling area at least potentially something to worry about for investors.”

As far as private equity is concerned, this could mean weaker underlying portfolio companies. A currency crisis would also likely mean a rise in interest rates.

Another aspect of private equity under the spotlight is the current taxation system under which carried interest is treated as a capital gain, and therefore subject to a 28 percent tax rate, rather than taxed as earnings – dubbed the “Mayfair tax loophole”.

In its recently-released 10-point plan to tackle tax avoidance, Labour pledged to “re-write the rules which allow private equity managers to get away with paying less tax than ordinary working people even when they have not been investing their own money.”
GPs should rest assured that under a Labour government carry would still be considered a capital gain, Tom Allchorne, director of communications at the BVCA, told PEI sister publication Private Funds Management in April.

Rather, the Labour party intends to crack down on those GPs without sufficient “skin in the game” financed by their own capital.

“What they are proposing to do is conduct an urgent review of the allegation that, in some cases, individuals have been awarded large sums in carry (taxed as capital gains) despite placing a nominal or minimal amount of their own money in a fund,” Allchorne told pfm.

Although Labour’s plan for taxation of GPs is not clearly articulated at this point, Moulton says that under a Labour coalition it is “quite likely that it would be more adverse over time for the tax of the GP” than it would be under a coalition involving the Conservative party.

While a Conservative-led government would seem to mean a more benign environment for fund managers and their LPs, such an outcome would almost certainly lead to that referendum on EU membership that is keeping CFOs up at night.

And they’re not the only ones. One investor source told PEI that the possibility of such a referendum was “disturbing” and could create uncertainty for UK businesses. As such this LP is increasingly looking to back British businesses with revenue sources outside of the UK.

“Going for the vote on Europe would probably mean a couple of years of instability and people would feel very reluctant to invest in the UK during that period,” Moulton says.