The case against private equity
The stupendous gains accruing to Blackstones and its founder, Stephen Schwarzman, inspire a mixture of moral vituperation and ogling envy. Capitalism, however, notoriously has its self-correcting mechanisms, however brutal, and the stage looks set for a denouement.
Two factors are conspiring to bring this about. One is the sheer scale of private equity buyouts, £22 billion last year in the UK. They now employ a fifth of the private sector workforce. The other is the easy-credit environment that has fuelled the explosion, but now seems likely to crash.
Private equity, which began benignly as venture capital pumping investment into start-up businesses, has evolved into a different animal – going after healthy companies, restructuring them to yield huge gains for equity partners at the expense of job losses for employees and crippling the companies with debt.
One example has been the AA. Within months of buying it, the private equity owners Permira and CVC axed 3,400 jobs and reduced services.
The engine for private equity enrichment comes from three tax changes in the past ten years. In 1998 the Government introduced “taper relief” on capital gains, cutting capital gains tax for people owning shares in their own companies or unlisted businesses from 40 per cent to 10 per cent, if they had owned the asset for at least ten years.
The bonanza took off in 2002 when the Government changed the rules again so people needed to own shares only two years for the 10 per cent tax concession. When all companies with highly paid employees started elaborate “share-based” schemes to disguise income as capital gains to get the tax benefit, the Government in 2003 changed the rules to require that shares as part of pay be declared as income.
The private equity gravy train all but collapsed. However, unaccountably, the Government then exempted private equity from the new rules. Never have the super-rich been showered with such lucrative partiality by any Government.
I want to see six changes. First, the taper relief loophole in capital gains tax for private equity should be abolished.
Second, tax incentives should be “staircased” to encourage investment of ten years or more, and discourage asset-stripping.
Third, looting of company pension schemes to increase gains for private equity partners should be blocked.
Fourth, tax relief for leveraged buyouts should end.
Greater transparency is needed from private equity, in particular quarterly reports.
A final key reform is that private equity be required to state expected and intended impacts of a takeover on jobs, debt, investment, and the future of the target company.