Tax changes would hit smaller firms hardest(2)

Lyceum Capital chief executive Philip Buscombe has weighed into the row over the tax treatment of carried interest, suggesting that changes to the rules will affect the ability of smaller buyout and venture capital firms to attract talented managers from the corporate world.

A leading buyout professional has defended the tax rules that controversially allow private equity executives to pay as little as ten percent taxes on some of their earnings.

Philip Buscombe, chief executive of UK mid-market firm Lyceum Capital, said in a letter to the Financial Times that changes to the tax treatment of carried interest could “severely damage” the smaller end of the UK private equity market, because it would make it very difficult for firms in this sector to attract talent from the corporate world.

Under the current UK tax system, buyout professionals’ earnings from carried interest are treated as capital gains rather than income. Given the taper relief rules, this means the effective tax rate can be as low as 10 percent.

Buscombe argued that the current fiscal incentives were designed to reward the substantial risks firms take when investing in start-ups and smaller companies. Private equity executives invest up to five years net salary in a fund, he said, and do not receive carried interest until the end of the fund’s 10 year lifecycle – and only then once a minimum return has been made for investors.

Buscombe believes this risk is no less great than that taken by other public and private company executives, who also receive taper relief. As a result, he suggests, any changes would make private equity less attractive to managers in the corporate world, and give them much less incentive “to invest in and spend years building these smaller companies”.

This would have a damaging effect, he said, since “there is a large body of evidence that private equity firms investing in smaller companies… are additive to the economy and jobs.”

One buyout professional said that the proposed tax changes would hit smaller firms much harder than the mega-funds, since most of the latter have a large proportion of their staff – and legal vehicles – domiciled outside the UK anyway.

The recent row was incited by comments by Nick Ferguson, chairman of investment group SVG Capital, who told the FT last week: “Any common sense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low paid workers…. can’t be right.”