Faisal Islam’s report on last night’s edition of Channel 4 News picked up on some of the recent developments in the private equity story. Faisal, by the way, is my favourite economics correspondent on TV and this latest piece really is worth seeing.
Doing the asset striptease
For some time the GMB has been campaigning against the private equity industry and the CBI, the bosses’ lobby group, has responded to their successful raising of awareness by launching a campaign of its own to defend private equity.
I observed two months ago:
Trade unions have sought to open a debate about the rise of private equity and its implications. The private equity purchase of the AA and subsequent filleting of the business has been cited as a typical case. From the perspective of workers laid off following a private equity buyout, these firms are ruthless asset strippers.
Any dispassionate analysis would conclude that private equity firms are subject to less regulation and have a greater interest in short-term profit than corporations. So, yes: they are ruthless asset strippers. There is not much that can be done for their reputation. It would be like trying to re-brand sharks as gentle creatures claiming that they are friendlier than dolphins.
What’s the deal, then?
Well, the supposed turnaround involves buying out a publicly listed corporation, ceasing the trade of shares on the market, and aggressively cutting back on wages and jobs. The grasp is not without immediate profit, but the intention is to sell the business back to the market within a couple of years.
And so, private equity firms have a short-term outlook: there is nothing beyond the first five year plan. Unlike the corporate form, where there can be shareholder activism and some limited scrutiny of the firms activities, the private equity is liberated from the corporate division of ownership and control.
Since the company’s assets are used to secure the funds with which it is bought, if this debt is not repaid the company could face cannibalisation – the best bits of being sold off. So even if there is no intention to break up the business and sell its component parts this could still happen.
Private equity firms are the asset strippers of the past, then, hoping that the historical record can be brushed aside with heaps of praise from the business press. The industry might be about “trimming the fat” but it is not productive or innovative – the fat is not replaced by muscle.
This has implications for the sustained economic growth that the capitalist system requires. With private equity there is no incentive for investment with an eye to future profit, little in the way of deferred gratification.
10 per cent of a lot
The case for the defence is faltering. Nick Ferguson, chairman of SVG Capital, a private equity firm and fund management company, revealed to the Financial Times that he pays a lower rate of tax than the woman who cleans his office. His outrage at this discrepancy has led to greater media attention being focused on private equity.
The body representing the private equity industry, British Venture Capital Association, unexpectedly lost its Chief Executive last week. Peter Linthwaite jumped ship after being grilled by a Committee of MPs.
It has now been revealed that private equity firms have made use of a tax break called taper relief that Chancellor Gordon Brown introduced in 1998 to promote entrepreneurial activity. There is nothing entrepreneurial about private equity, of course, and their use of this 10% tax rate means the Treasury misses out on around £600 million each year.
The Chancellor has seen the growth of private equity as a sign of the City’s success. And whilst it might contribute to economic growth in the short term, there are doubts about the long term outlook for companies that have fallen to private equity.
Brown spoke to the GMB conference on June 5 and mentioned that a review of the tax regime imposed on private equity would be reporting soon. Despite his reluctance to come out in favour of an increase of taxes for the industry, the GMB’s General Secretary was pleased with what the next Prime Minister had to say: “From what Gordon Brown told our conference, we conclude that the fat cats are losing the argument on tax,” Paul Kenny told the BBC.
The fat cats might be losing the argument, but there are no signs Brown will heed the verdict…
Clunking fist, hidden taxes
In this year’s budget, Brown announced he was doubling the 10% tax rate paid by some of the poorest workers. The budget was widely regarded as sleight of hand on the part of the Chancellor, who appeared to be cutting taxes. (He did: corporation tax was lowered, a nod to the multinationals.)
The media response was typical. It was not a major news story that Brown would have the lowest paid would pay more tax; there was no “public outcry” by the tabloid newspapers.
The increase is to be implemented until 2009, and unless it can be defeated by the trade unions before then, it looks as if it will pass unnoticed. Of course, the workers affected will be hit, but as they are the least likely to vote or be unionised, it is hard to know who else will care.
Brown’s length tenure as Chancellor of the Exchequer has been good for bosses, but not for workers. The burden of taxation has shifted even more onto working people. The Treasury’s tax policy is regressive rather than progressive.
The Financial Services Authority is to carry out further investigations into the industry because it is concerned that some firms have excessive debts, though it believes that the biggest risk comes from conflicts of interest and market abuse.
Reports suggest that the private equity industry is cool about changes in taxation. This is because any change to the tax regime would affect only 40 of the top 200 executives, as most of the rest have non-domiciled status. In other words, though they live in the UK they are not taxed in the same way as ordinary people.
Private equity bosses were roasted by the Treasury select committee today, having stepped out of the shadows to defend their industry to MPs for the first time. Robert Easton of the Carlyle Group, Damon Buffini of Permira, and Dominic Murphy of KKR all stepped up to argue that private equity was the best thing since sliced bread. For the three thousand AA employees that have been put out of work since the company was bought by KKR this might seem a bit rich.
The industry appears to regard some change as inevitable and private equity bosses must realise that paying more tax would take the heat of public scrutiny of the industry for a while. Besides, they would hardly feel the pinch of a tax rise – unlike the millions of working people who pay a higher rate of tax than bosses and will suffer the consequences of instability wrought by private equity.
Brownites in Labour’s deputy leadership contest have described proposals to make rich people pay more as “punitive taxation”. Supposedly, if the taxes on the wealthy were higher, they would leave the country. But off-shoring is carried out by the rich already, and the major impact of the international super-rich physically leaving would be to lower house prices in London’s affluent areas. If they are so valuable to the economy why not pay them to live in the UK?
Those who follow the consumer model of bourgeois politics would have us believe that there is no appetite for a progressive tax regime. This is untrue, but the problem in talking about tax hikes is that the capitalist press is apt to portray rises for the rich as a squeeze on the mythical middle class, the only socioeconomic group to be mentioned by name.
Jon Cruddas, the leftwing outsider in the contest, has shied away from supporting a higher level of taxation for the super-rich minority. Cruddas, who has substantial union backing, is wary of the Old Labour tag but favours a return to class politics and a greater focus on the party’s base.
I am skeptical about Labour’s ability to re-engage with the millions of working people who have stopped voting since the advent of New Labour, but raising the issue of the gross inequalities prevalent in Brown’s Britain will be of importance in building resistance to the neo-liberal agenda.