Well it is nearly August. That parliamentary committee that has been grilling the private equity boys is shutting down along with parliament until the Autumn. In the meantime it has made a decision - not to decide - yet. John McFall, chairman of Parliament’s Treasury Committee put it this way. He said “many aspects of the private equity industry are highly complex and a short inquiry cannot do full justice to them. We have been correspondingly cautious.” So, it’s been decided then, to give this a lot more thought.
There are three aspects of private equity that are set to come under the spotlight.
Firstly, it’s the way private equity managers are remunerated, via carried interest payments. This means that they pay capital gains tax, rather than income tax, meaning they qualify for taper relief, meaning their tax bills are often quite modest in proportion to their salary.
Secondly, in the way private equity companies can deduct the interest payments on the money they borrowed to buy a company from the profits that company made.
Thirdly, many don’t like the way the British tax system only taxes foreigners resident in the UK on their earnings in the UK. This aspect of British tax law is not specific to private equity, but it’s a tax benefit often enjoyed by private equity’s cohorts.
Others fear that private equity companies strip firms of their assets, making their balance sheets weaker and less able to withstand shocks.
On the other hand, there is also evidence to suggest private equity run businesses become more efficient, and ultimately, are able to build upon that efficiency and then actually employ more people than if they had stayed a PLC.
The truth is, however, that right now evidence either way is inconclusive.
No wonder the parliamentary committee wants a lot more time. No doubt, it will eventually conclude that a more thorough investigation is needed.
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