Private equity bosses, under fire from unions and politicians, called for a simpler UK tax regime and warned British legislators on Tuesday that the current system was too complex and could stifle business.
Partners from four top buyout firms answered questions from a Treasury Committee for more than an hour, amid increased scrutiny of the sector after a take-over spree that has included household names such as drugstore chain Boots.
Peter Taylor, managing director of Duke Street Capital, told the committee a simpler system could bring in a higher tax take without hitting business, suggesting a rate around 15 to 20 percent - well above current levels as low as 5 percent. Jon Moulton, founder of Alchemy, said there would be real benefits from a massive simplification of a system he called "horrendously complicated".
Low tax rates paid by industry executives have provoked criticism which has recently been fuelled by news that the head of US-based Blackstone Group, which is also active in Europe, earned nearly $400 million last year. Critics say individual private equity partners reap the benefits of deals without taking on real risk or paying their fair share of taxes.
But Moulton warned the committee any radical changes could damage business. "You keep saying we are giving you a low tax rate. You should perhaps be looking at it the other way around - you are getting some tax," he said. "If you're not careful, you might not."
Private equity firms have grabbed the political spotlight in Britain in recent months, but the attention comes as conditions for raising capital look set to become tougher as interest rates rise. "There are some deals being pulled, there are some difficulties in the debt market," Moulton told legislators. However for the time being conditions are benign and CVC Capital managing partner Donald Mackenzie characterised the industry as doing superbly.
"The current state of the market, I would say, is buoyant, as good as it's ever been," he said. "There are lots of good deal opportunities and there's substantial capital and finance available to do them."
The industry has taken steps to tackle its reputation for secrecy and excess, with trade groups appointing former Morgan Stanley International Chairman David Walker to lead a group to develop self-regulatory guidelines. Speaking to the committee, Walker confirmed plans to introduce recommendations this year but warned lawmakers against implementing technical rules.
Walker said legislation should be a last resort if firms fail to comply. "I am doubtful of the need for black-letter sanctions," he told the committee. "I don't see a place for regulation or primary legislation in this space." He said the industry's guidelines would recommend, for example, that reports and accounts be published online four months after a company's year end - well ahead of the nine-month legal obligation. Reports would also include some disclosure on managers in funds, though not on limited partners.
The committee, due to produce a report on private equity for parliament, also quizzed the Financial Services Authority, which reiterated its warning that firms should prepare for turbulence as a result of rising leverage and risk. "We can all see that leverage is rising, therefore there is a certain inevitability that at some point in the future a deal will fail as a result of excessive leverage," Hector Sants, the FSA's wholesale and institutional managing director, said.
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