Monday, 30 July 2007

Interim select committee report on private equity

The Treasury select committee has published the interim report of its review of the private equity industry. You can read it online here. It's a very interesting report, much more balanced than the mud-slinging at the public evidence sessions might have suggested was possible. There's quite a bit of discussion of the nature of different types of ownership in there. I'm a big fan of Paul Myners and the following quote from him in the report is bang on I think.

The ultimate investors in private equity are the same ultimate investors in public equity - the pension funds of companies, not-for-profits, public authorities, insurers, endowments and private investors. These investors should ask why they invest in private equity with its association with aggressive capital structures, high incentives for management and a minimalist approach to governance … while adopting an entirely different set of approaches when investing in public equity. Determination of the most efficient form of financing (use of debt) should not be a function of the form of ownership and yet it appears to be.

I also had to have a bit of a chuckle because the report clearly endorses a review of the taxation of carried interest, yet I read just yesterday in The Independent (a popular comic) that the committee would duck the tax question:

My mole in Whitehall tells me that the committee, led by the uncompromising John McFall MP, will steer clear of recommending that the Government slap additional taxation on the buyout industry.

Although the review does not explicitly say "tax private equity more" it does say all of the following:

14. We recommend that the Treasury and HM Revenue and Customs consider the tax treatment of carried interest as part of their review of the taxation of employment-related securities, and that they publish the results. (Paragraph 88)


16. The Treasury is already reviewing "one specific aspect of the current rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals"; the outcome of this review will be reported in the 2007 Pre-Budget Report. We recommend that, in addition to reviewing the tax treatment of debt in highly-leveraged transactions, the Treasury and HM Revenue and Customs examine whether the tax system unduly favours debt as opposed to equity, thereby creating economic distortions. (Paragraph 94)

17. Whilst recognising that this issue is not exclusive to private equity, we ask the Treasury to inform us of the progress on the 2003 review of the residence and domicile rules as they affect the taxation of individuals, setting out what evidence has been assembled, whether any external advice has been commissioned and the rationale behind any proposed changes. Given the apparently rising number of the non-domiciled, and a perception that monitoring of the status of non-domiciles is weak, it is essential that the Treasury and HM Revenue and Customs are able to demonstrate that they have a rigorous approach towards claims of non-domicile status. (Paragraph 95)

Clearly the Indie's sources aren't up to much!

Also today sees the publication of motions to the TUC's annual congress. John W has done a summary so I won't bother. But there are a couple on private equity. One motion from Connect suggests setting up a database on private equity funds, which sounds like a great idea to me.

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