MAGGIE PAGANO: Tax breaks, a catalyst for private equity buyouts
MAGGIE PAGANO: There are many reasons why private equity firms are leading the charge in buyout activity – but tax breaks are by far the biggest catalyst
Over the past week, the Daily Mail ran a campaign exposing the astonishing number of UK companies that have been taken over by private equity firms.
Since the coronavirus outbreak last March, 123 companies have been taken over by private equity firms and 19 more transactions are underway. This brings the total value of the buybacks to £ 52.6 billion.
The Mail’s investigation also found that 26 of the 67 retailers that cut nearly 40,000 jobs during that period are either privately owned or have been.
Plan Ahead: Chancellor Rishi Sunak Must Tackle The Problem Of Private Equity Buyouts
There are many reasons why private equity firms are leading the charge in this buyout activity. But tax breaks are by far the biggest catalyst.
First, private equity firms structure their transactions with huge chunks of debt because the interest rates are so low. This means that interest payments can be deducted from tax.
Second, people who personally invest in the business can benefit from tax benefits – known as “carry” – which are the personal gain from their investment. This carry is taxed as a gain rather than an income and leads to very big gains: a 2017 report estimated that £ 2.3 billion of carry was paid to 2,000 investors. It is not just the tax benefits for individuals that are disproportionate.
Most private equity firms also tend to misallocate wealth among the companies they buy.
Rather than spreading their profits, by investing in new facilities, R&D or manpower, many owners pay themselves big dividends, often out of borrowed money.
So it also has a ripple effect on the economy as a whole.
If Chancellor Rishi Sunak is serious about stimulating growth and promoting government procurement through the so-called Big Bang 2.0, he should consider levying CGT on these people at their income tax rate.
Homeowners should also be prohibited from paying dividends with borrowed money, at least for a few years, to discourage short-termism.
However, if Sunak is to go further in promoting a new generation of equity capital and the growth of SMEs, it should consider excluding equity investments in certain qualifying companies, say those valued at less than $ 250 million. of pounds sterling.
Such a measure would encourage those who are willing to take risks with their capital – the source of capital gains tax – and discourage those who want to take their businesses into debt. It would certainly make the playing field more level when it comes to equity rather than debt.
Yet despite the tax advantages of private equity, London’s public markets are flourishing. Since the start of the year, there have been 35 IPOs on the LSE and AIM, raising £ 8.7bn, and £ 16.3bn in equity has been raised via IPOs on the stock exchange and secondary issues with quotes from Dr Martens to Moonpig.
In the first quarter alone, there were 25 floats, the most active since 2015, and in value, the highest since 2006. Fears that listings would be evacuated to Amsterdam or other European stock exchanges have materialized.
They also won’t run away if the LSE has anything to do with ensuring that London remains the most competitive and flexible financial center to raise capital after Brexit.
The stock market knows that it cannot rest on its laurels, or even on its heritage, if it wants to stay ahead of European stock exchanges, but also prevent British companies from going to the United States to raise funds. capital or to be bought out by private equity. That’s why he’s working so closely with the Treasury and the Financial Conduct Authority to find ways to make London even more attractive.
These include the controversial proposals for Spacs – the blank check companies – designed to help investors raise funds through an IPO to buy private companies.
While the LSE is backing Spacs, it has suggested to the FCA, which closed its consultation this week, that the market cap should be capped at £ 150million or less to ensure adequate funding.
The more intense debate arises later this summer when the FCA opens a consultation on Lord Hill’s reforms to modernize registration rules.
While they may seem radical – by allowing two-class equity structures to give founders more control over their companies and reducing the free float to 15 percent instead of 25 percent – they could help open up further. plus public procurement. These movements must be supported, as long as the rules are also transparent.
One size does not fit all. As an LSE director recently told colleagues, London needs to make the most of the system while maintaining the highest standards of corporate governance.