Memorandum submitted by HM Treasury
The Government welcomes the Treasury Committee's
inquiry into this important subject. Private equity remains a
relatively small, although a growing, part of our economy and
the Government's approach was set out fully in a speech given
by the Economic Secretary on 8 March 2007.
2. The Government's starting-point is that
any particular form of ownership is not inherently to be preferred
to any other. Private equity, like any other form of ownership,
has good and bad aspects. The Government's objectives in this
field should be no different from that in relation to any other
form of ownership: to promote high and stable levels of growth
and employment through an environment of long-term, sustainable
business success, underpinned by a strong culture of clear disclosure
to, and engagement with, underlying investors.
3. The impact and role of private equity
transactions vary widely in their nature. Moreover the available
evidence base remains quite limited and results are to some extent
conflicting and mixed.
4. Nevertheless, there is a reasonable consensus
in the evidence available that private equity investment has a
positive impact on productivity. Moreover, the evidence suggests
that private equity firms do own companies for significant periods,
on average around three years, which is 20% longer than the average
length of time institutional investors hold shares.
5. One potential advantage of the private
equity model is that the chain of ownership and communication
is relatively short, giving the owners of capital much clearer
direction of the businesses which they are financing than under
some other forms of ownership. The advantages of a shorter chain
of ownership, with clearer targets and accountabilities, will
in some cases outweigh the benefits of public market ownership.
Nevertheless, investors need to be vigilant about any potential
for misalignment of incentives within the private equity model.
6. As the private equity model becomes an
increasingly important component of UK capital markets, it is
essential that the regulatory environment is appropriate. This
is the responsibility of the FSA who regulate private equity firms
who engage in these financial activities. The FSA issued an important
discussion paper on its regulatory approach to the sector last
November and a response is expected in the coming months.
7. Transparency and disclosure have also
been important issues for the industry. The Government welcomes
the establishment of a working group chaired by Sir David Walker,
which is currently working to develop a voluntary comply-or-explain
code to improve transparency and disclosure. The Government will
watch developments in this area very closely.
8. The Government is strongly committed
to a competitive tax environment that promotes enterprise. There
has been some debate in recent months about a range of tax related
issues, including the tax-deductibility of interest payments,
shareholder debt and carried interest/management equity.
9. There is no special tax relief for interest
paid by private equity-owned companies. Interest is in general
is treated as a business expense for tax purposes. Most major
tax systems adopt the same approach and international capital
markets and global businesses are structured on this basis. There
are no plans to review this fundamental principle.
10. The Government has, however, announced
that it is 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 report back by the Pre-Budget Report 2007.
11. There has also been some discussion
on the tax treatment of gains made by individuals on private equity
fund managers' carried interest and management equity participation
in private equity firms. The Government keeps all tax policies
under review and has for some time been actively reviewing the
taxation of a range of employment-related securities.