I’m hoping to meet workers from the AA and NCP tonight, just before the adjournment debate I’ve been able to secure.
Private equity firms are now going after healthy, well-managed companies, looting them in the interests of huge personal gains for themselves at the expense of enormous job losses for employees and crippling the companies with debt.
Examples include AA – where within months of buying it the private equity owners Permira and CVC Capital had cut 3,400 jobs and reduced front-line services for motorists drastically. Birds Eye – where Permira pledged to keep workers’ employment terms for at least 3 years, then within 5 months closed a plant in Hull at the cost of 600 jobs.
Debenhams – where the private equity partners increased the firm’s debt from £100m to £1.9bn, paid themselves a dividend of £1.2bn, sold the freehold of the stores for £500m and leased them back, and then floated the business and took another £600m, thus making 3 ½ times their investment in a little over 2 years and leaving Debenhams with huge interest payments and rent on stores it once owned.
Private Equity is now lining up Sainsbury’s and Boots for the same treatment. As Roberto Italia, then of Warburg Pincus, now of Cinven private equity, has said: “Of course we’re out to shaft the companies we invest in.”
I want to see six major changes in Wednesday’s budget:

1 The taper relief loophole in capital gains tax for private equity firms should be immediately ended.

2 Tax incentives should be ‘staircased’ to encourage long-term investment of 10 years or more, and to discourage short-term in-and-out asset-stripping.

3 The restructuring of company pension schemes to increase personal gains for private equity partners should be blocked.

4 There should be much greater transparency required from private equity operations, in particular the requirement to provide full quarterly reports in the same way as publicly quoted companies.

5 The provision of tax relief for leveraged buy-outs should be ended.

6 Private equity firms should be required beforehand to provide a public interest statement of the expected and intended impacts of the takeover on jobs, debt, investment, and the longer term future of the target company, and this statement should be contractually binding for a stated period at least as far as employment is concerned.

The engine for this private equity plundering comes from three tax changes made in the last ten years. First, in 1998 the Government introduced ‘taper relief’ on capital gains, slashing capital gains tax for people owning shares in their own companies or in unlisted businesses from 40% to just 10%, provided they had owned the asset for 10 years. The real bonanza started in 2002 when the Government, amazingly, changed the rules again so that people only needed to own shares for 2 years to qualify for the hugely valuable 10% tax concession. Then when all companies with highly-paid employees started setting up elaborate ‘share-based’ pay schemes designed to disguise income as capital gains, the Government in 2003 changes the rules yet again to require that shares received as part of a pay package be declared as income. The private equity gravy train nearly ground to a halt. However, unaccountably, the Government then exempted private equity from the new rules. The gravy train rolls on as a special deal for private equity.
This loophole is costing the Treasury a fortune. From a mega-fund buy-out of £10bn such as is being put together for Sainsbury’s, the private equity partners might expect to walk away after a few years with perhaps £2.8bn. If that were taxed as income, the Government would get £1.1bn in tax. But taxed as a capital gain, the effective tax rate might be as low as 7.5%, or just £210m. The Treasury thus loses £900m. Official figures show that this loophole is costing the Treasury a fortune, with taper relief costing the Government £4.5bn this year, up from £550m in 1998.

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