The private equity whitewash report
The naivety of the private equity industry is breathtaking. With the continuing political furore still in full swing about the Babylonian excesses of this latest capitalist symbol of greed incorporated, the industry set up its own review chaired by City banker Sir David Walker. It's just reported, so what do they think needs to be done? What a surprise! Nothing, except set up a code of conduct to increase the supply of information. And yes, you've guessed it - it's voluntary, so nobody has to do anything. Everything in the garden's lovely. What a monumental whitewash.
First, do they really believe that setting up their own inquiry, led by a City banker who has done 12 years at Morgan Stanley and who heartily approves of the buyout business, is going to carry one scintilla of credibility? It's obviously just a cover-up to try to pre-empt real action by the authorities. It will be blown away with contempt for the chaff it is.
Second, it completely ignores the really big issues which are far more important than simply greater transparency. The taper relief tax loophole which enables private equity partners to plunder their victims, under the deceptive title of 'carried interest' (an annual 20% rake-off of profits running into gains of millions per partner), and then pay tax at a lower rate (somtimes 5%) than the cleaners of their offices, needs to be stopped immediately.
Then there's the tax fiddle which powers the whole private equity engine. The tax relief which permits large-scale leveraging of some of the biggest companies in the country, buying them by raising enormous sums of debt which are greatly reduced by tax deductions, should be ended. This tax concession was originally aimed at helping small venture capital businesses which need early assistance to survive in the market, but it has now been purloined by the asset-stripping sharks to oil their predatory excesses. It should be stopped in the next Budget.
There is another very good reason too for reining in private equity. The sheer scale of recent multi-billion private equity deals is now exposing banks to a default risk on a scale not seen since the stock market crash of the late 1980s. Ironically, this very realrisk is driven by the banks' perception that they can't afford not to participate because the potential rewards of some of the biggest deals are so enormous, yet if they do take part and the firm fails as the easy-come credit bubble collapses as interest rates continue to rise, their exposure could bring them down. As ye sow, so shall ye reap.