The private equity industry is in the process of being tarred and
feathered with accusations that it is secretive, privileged and harmful
to UK plc.
The overwhelming majority of the industry would refute those accusations vigorously.
But then why is the industry in the dock?
It is there because of some legitimate concerns about the way in which it has developed and expanded over the last few years.
But the industry is already facing up to these concerns and it is quite
right that there should be a forthright debate about the challenges
that it faces and the opportunities that it continues to present.
Private equity should not be afraid of scrutiny and, indeed, it is not.
I am pleased that the Treasury Select Committee inquiry has provided a forum for these concerns to be examined and addressed in the context of the vital contribution that the industry makes to the economy.
First is the vexed issue of transparency.
When I began working in the private equity buying a £25-million company was a big thing, but today billion-pound transactions are routine.
As the industry has matured, it must meet the challenge of increased transparency and it will do so.
But we must be careful not to overstate the problem. Private equity backed companies are accountable to their shareholders in the same manner as public companies.
Rather more so, in fact, because their shareholders tend to be more involved in management decisions and their investments are more long-term.
Second, the industry must recognise that its very success means that it must reassess its role in the marketplace in order to place a premium upon corporate social responsibility.
And as it begins to acquire household names like Boots, its attitude to employees and its responsibility to communities must be a prime consideration for fund managers.
Nevertheless, the available evidence suggests that Private Equity takeovers create jobs in the medium and long term.
Third, the industry must also get back to its roots in true venture capital by taking risks and investing in innovation, not just established brands.
But we must be quite clear that private equity receives no special tax breaks or concessions.
Private equity uses the same tax reliefs available to all other businesses.
So the question then becomes whether it is appropriate to consider wholesale reform of the tax system in order to counter a perceived unfairness?
Ed Balls, The Economic Secretary, has himself admitted that:
"I do not think it right…to have a particular set of rules that disadvantage private equity companies relative to other parts of the economy."
That is the essence of progressive taxation.
The Government needs to tread very carefully before responding to the media clamour for changes to the tax system.
A knee-jerk and poorly thought out response could cause considerable damage to the economy, and may well disproportionately impact smaller businesses that would not be able escape offshore or alter their capital structures quickly enough to soften the blow of any changes.
As the deputy director of the CBI has said:
"tens of thousands of entrepreneurs and small businesses are creating jobs and prosperity in the UK because of the way capital gains tax and taper relief motivate and reward them for the risks they take."
Some questions have recently been raised over whether taper relief should continue to apply to the carried interest held by private equity partners.
But carried interest is not, as some have asserted, an ‘income’ bonus on a job well done and therefore subject to income tax.
Carried interest is a share of the ‘capital’ gain made on a profitable investment and as a result it is subject to capital gains tax and, if held for a minimum of two years, qualifies for taper relief.
Private Equity should not continue to be made the scapegoat for Labour’s lurch to the left.
The industry welcomes legitimate concern and scrutiny but not politically motivated scare-mongering.
As the Economic Secretary told the House of Commons recently:
"We should not demonise a particular sector, but instead promote more long-term growth and job creation in our economy."
And that is precisely what the private equity industry offers.