Gordon Brown is now
The mauling of the
Comments made by Brown to trade unions that his administration will seek “justice and equality in all the tax treatment” would seem to imply a tougher stance, unless the comments were just a sop to the Labour Party’s traditional supporters. In the past Brown has done plenty to encourage entrepreneurship, from tax incentives to setting up Enterprise Capital Funds to stimulate investment in small to medium sized companies. His right-hand man Ed Balls, economic secretary to the Treasury, made comments in March that were largely supportive of private equity and were generally well received. Tony Blair has also made comforting noises – in a June Prime Minister’s Question time with Liberal Democrat leader Sir Menzies Campbell. Nodding to the infamous comments made by
Brown’s tenure as chancellor has seen an increase in both individual and corporation tax. In 2003 he caught everyone by surprise when a new regime for taxing shares and securities acquired in connection with employment were introduced in 2003, and in 2005 his department tightened the rules of tax deductibility of interest on shareholder debt. He also restricted the ability of pension funds to invest when, in 1997, he removed the tax credit attached to dividends they received from UK companies. More recently he made VCTs a less attractive investment proposition by reducing tax relief to 30% and limiting the size of companies that are eligible to raise money from such investment entities – no more than £15m pre-investment and £16m after and with no more than 50 employees.
Both the Labour Party and the Conservatives want to be seen as people that business can trust, so it is unlikely anything extraordinary will happen in the coming years, but changes of some sort are expected. David Silver, managing director of financial consultants Baird, says: “He has increased the tax burden as Chancellor and there is no reason to see that changing. The recent negative press related to tax incentives etc has been building momentum and there seems to be an implication that the Government will react.” Silver remains confident however that deal flow will not be affected, foreseeing a “natural rebalancing” following any changes to the treatment of carried interest, which will involve the tweaking of fund structures.
Simon Witney, a private equity partner at
A proven fan of stimulating SMEs, Brown will likely continue to pursue this course, but UK private equity houses remain on red alert. One private equity advisor referred to contemporary tax planning as a “pain in the arse” – and the situation is unlikely to improve. The problems have even been recognised by the
The industry in the UK is already besieged by problems and any moves against it by the Government could seriously dent deal flow in the medium term.
The UK’s pension deficit problem is also damaging acquisition prospects, albeit only at the larger end. KKR will have to shell out £1bn to cover Alliance Boots’ deficit, and the Sainsbury deal was abandoned by CVC, Blackstone and KKR because of the £2bn needed for its pension. The UK Pensions Regulator is now recommending regulatory clearance for leveraged buyouts of companies with pensions deficits.
The UK is also Europe’s most competitive market. There are more firms in London than anywhere else in Europe, and still more are being added to the pool.
This requires firms to put in a significant amount of work in the build-up to the acquisition of an asset.
It has been this way for the UK market, and indeed the Nordic market, for some years now. Financial engineering alone doesn’t cut it any more according to GPs – there has to be a “story”, as it is now popular to say amongst LBO professionals. In short this means a firm has to take a company, improve it, grow its profits and revenues etc – either organically or through acquisitions – to make healthy returns at exit. Whether this is true is a different matter. It may well be the case at the smaller end of the market, but the further up the price scale you go, the less obvious it becomes – what, for example, did CVC, Merrill Lynch and Texas Pacific Group (TPG) actually do to Debenhams in the two years between their purchase of the UK department store and its 2006 IPO? Not a lot really, they just played the markets well.
There have also been some reports that suggest a number of high profile auctions have been less successful than expected. Apax and Permira were hoping to raise around £2bn for fashion retailer New Look, but so far bids have topped out at £1.7bn. The unwillingness to pay top dollar has been put down to general uncertainty over the retail market and scepticism over whether the business can expand overseas as well as the vendors would like to believe.
Anyone who is sounding the death knell of the UK private equity market would be a fool – people have been warning of a downturn for at least the past three years – and of course, on the record, GPs are as robust as ever – while all admit prices are high, none will admit that opportunities are rarer – but off the record, there is some disquiet in light of the political and media attacks LBO funds are now subject to. There is every chance that the figures for 2007 will again record new highs for the industry, but the constant flow of negative headlines is causing concern amongst all GPs, from the top right down to the lower end. While banks continue to offer such aggressive funding packages, activity will continue to remain high, but the seeds are being sown for a future downturn: ever-climbing prices, a government taking an increasingly sceptical, if not downright antagonistic, approach, and media scrutiny that shows no signs of abating.