The imminent UK General Election is expected to be one the most closely fought in decades, with polls currently unable to separate the two leading parties and a coalition government in some form a real possibility. This creates potential uncertainty for both businesses and private equity houses that invest in them. But what are the knock-on effects? Is this uncertainty causing transactions to be speeded up to take advantage of the “tax certainty” of legislation in its current form, or are vendors putting transactions on hold until after the election?
For deals which are already well advanced, we have seen a strong desire on both sides to complete the transaction before the General Election. This avoids the risk of tax rules being changed shortly after a change in government – we will discuss these potential changes later in this article.
BUSINESS AS USUAL
However, in a majority of cases, parties are adopting a “business as usual” approach. Private equity houses typically focus on the specific micro factors that can affect a business, rather than the macro picture. In most sectors, a change in government or government policy should not have a direct impact on the business itself. There are of course exceptions – heavily regulated businesses or businesses dependent on public sector spending are more likely to be affected by a change in government. In these areas, a “wait and see” approach seems to be more common.
Our experience over the last nine months has been that the market continues to favour sellers – with strong businesses attracting high multiples assisted by better availability of debt finance. Corporate finance advisers selling good businesses are able to run highly competitive processes to extract the best terms for vendors. The period between private equity bidders being granted exclusivity and completion continues to shorten and the terms offered to management teams continue to be very favourable. We have not seen the coming General Election change these trends yet.
However, the private equity industry faces a wider challenge to improve what can still be perceived as a negative public image in certain quarters. The BVCA recently began a new campaign, The Investment Agenda, to demonstrate the positive impact that private equity and venture capital has on the UK economy.
Tim Hames, Director General of the BVCA, has commented: “Growth companies are the bedrock of economic stability and success and it is imperative any future government focuses attention on creating an environment to enable such businesses to expand and succeed. Private equity and venture capital, at its essence, is about funding and supporting these types of enterprises – be they in retail, manufacturing, biotech or video games – and what we need to see from the next administration is a commitment to a robust investment agenda which places growth companies at the very heart of the UK economy.”
In some sections of the press, it has been suggested that The Investment Agenda campaign is a defensive action from the BVCA, which it has taken to counter the perceived threat of a more interventionist Labour-led government. Whether this is correct or not, it is right that the BVCA and the industry in general continues to send positive messages to the wider public on the contribution that private equity makes to the UK economy.
Irrespective of which party wins the General Election (or come to lead a new coalition), we know there are likely to be changes to the tax landscape during the next parliament. What form these changes will take is one of the big unknowns.
Before the 2010 election there was a buzz amongst business owners about potential increases in capital gains tax. There was pressure for M&A transactions to take place before the election. The CGT rate was then 18 percent and the entrepreneurs’ relief limit had been doubled to £2 million by Alastair Darling in his final Budget. Everyone feared that the tax rate could only go up. A number of people under took tax planning to enable them to lock into the CGT rates because of the risk of an increase was considered to be so high. They were right. Just three months after the election in 2010, the rate of CGT was increased to 28 percent for higher rate taxpayers. This was softened by an increase in the entrepreneurs’ relief limit to £5m. In March 2011 the entrepreneurs’ relief limit went up to £10m, where it has stayed ever since.