Tax Research UK

FT.com / Lex / Alternative Investments - Private equity disclosure.

I admit I’m no fan of Mike Rake. He headed KPMG to near disaster and a $456 million fine during his tenure as worldwide senior partner. How and why he got a knighthood and got further work after leaving that firm beats me.

But he did. He was asked to review the voluntary code of conduct for private equity firms, and has now reported. It looks like the Lex column at the FT are no bigger fans than me:

Most research into the private equity industry has little credibility. It is partial, based on carefully selected information and usually sponsored by the industry itself. The naturally suspicious will therefore look with scepticism at Sir Mike Rake’s glowing report into compliance with the voluntary code of conduct that the industry adopted last year. Intended to stave off accusations that the private equity model depended unduly on leverage, job-cutting, asset-stripping and tax avoidance, the code is part of an industry strategy to deflect calls from politicians and trades unions for regulatory and legislative constraints on the buy-out artistes.

This year’s report gives the sector North Korean-style acclamation. All 34 private equity firms covered by the guidelines met all the code’s disclosure requirements.

Mike Rake less than objective? Shurely not?

But it remains fair to ask why did he get this job given what happened at KPMG?

Richard Murphy Private equity

Private equity firms using company debt to enrich themselves, says report | Business | guardian.co.uk .

From the Guardian:

Private equity firms are increasingly saddling companies with debt to pay themselves hefty bonuses, according to an industry-sponsored study.

A group of 47 private equity-owned businesses – including United Biscuits, sports chain Fitness First and casino operator Gala Coral – now have an accumulated debt of £71bn, up £13bn from their combined debt before they were taken over, said a report by BVCA, the British Private Equity and Venture Capital Association.

Of that £13bn, new owners directed £11bn towards acquisitions and capital expenditure programmes while £2bn went to pay shareholders of the private equity funds through measures such as special dividends.

No news you might say - vulture capitalists enriching themselves, but  the reality is that this is them admitting that they borrow to pay themselves. And that is candid omission of stripping if ever I saw it. And not by any stretch of the imagination can that be called ‘adding value’.

Richard Murphy Private equity

FT.com / Companies / UK companies - Moulton quits as Alchemy head.

Jon Moulton, one of the founding fathers of the UK private equity industry, has resigned as head of Alchemy Partners.

He announced his departure with a vitriolic attack by letter on the firm he founded in 1997.

“The state the firm is now in leads to the view that the best solution for investors and the partnership is an early orderly plan termination,” he said. “The plan’s economics are no longer favourable.”

So, is private equity a bust concept?

Some of us have always thought that.

Maybe others are now realising it.

Richard Murphy Private equity

FT.com / Companies / UK companies - Nearly 75% of private equity exits end with receiver.

Nearly three-quarters of all UK private equity exits ended in administration in the three months to June, underlining the scale of challenges facing the industry as the value of new buy-out deals shrank to a 14-year low.

Out of 108 buy-out exits this year, nine were secondary buy-outs, 25 were trade sales and 74 ended in receivership, according to research published on Wednesday by the Centre for Management Buy-Out Research (CMBOR) at Nottingham University.

There were no buy-out exits via a stock market flotation for the sixth consecutive quarter, another record.

Surely this shatters the private equity bubble for good? Not only did they receive massive state subsidy in the form of interest tax relief, profit exported abroaduntaxed  and low rates of capital gains tax on what should have been income, they also very obviously failed to add value. In fact, as this data shows, they were just riding the back of an asset bubble, in exactly simialr fashion to the housing market.

I have nothing against venture capital: I have run VC backed companies. But private equity is just asset stripping. There has never been a place for that in a sustainable economy. It has to go.

Richard Murphy Private equity

Private equity does a u-turn | ToUChstone blog: A public policy blog from the TUC.

Tax havens, banks and private equity appear to be in maximum misinformation mode right now.

Do they really think we’re stupid?

Richard Murphy Private equity

Reuters has reported that:

Private equity investors are threatening to leave the Netherlands due to a proposed law that could raise the tax they pay on investments to as much as 52 percent from 1.2 percent currently, investors said on Wednesday.

“If the government is proceeding with this law there is no reason for us to continue our activities. We will seriously consider going to do something else,” said Floris van Alkemade of Solid Ventures, a company which has invested in six Dutch IT start-ups.

So here’s a simple question? If these market participants think that their activity is only viable with a tax break (also known as a tax subsidy: they’re one and the same thing) should they be happening?

You can be sure they’d argue against any state subsidy to a nationalised industry. Why is it OK then for a private equity operation to have that subsidy?

Richard Murphy Private equity

The Budget contains revisions to the rules for employment related securities relating to people who are resident but not ordinarily resident in the UK. These rules get so close to making the private equity carry chargeable to income tax for some non-domiciled people.

But then you have to remember that the BVCA rules deem the carried intrest in private equity to not be employment related securities, even though they obviously are.

So near. So close. So far to go to creating fair taxation.

Richard Murphy Domicile, Private equity

The Independent ran a front page story on the cost of tax havens to Europe. It’s not 100% accurate but the location of the story in the paper gives some indication of how they view this.

The Guardian covered the fact that both the Treasury building and the Home Office are now owned through offshore structures, despite the post- Mapeley requirement that these be kept out of PFI rules. Those structuring these deals have, of course, found ways to get round such rules, as is the normal abusive fashion of he finance industry and those that advise it.

The non-dom issue continues to roll. I recorded on the issue twice in the day - both for transmission soon.

Liechtenstein continues to be big - and the media who have not yet been near the story continue to seek new angles upon it.

Everything to me says that my belief that there has been a ‘tipping point’ in attitudes towards tax is true. Indeed, when I say as such to journalists and others they seem to recognise the reality of this immediately, as if they have been offered the explanation for a phenomena they are observing of a type they have not previously experienced.

I can’t be sure I’m right, but what also amused me was just how many journalists and others openly laugh at the defence of tax haven activity that they are being offered by the remaining advocates. The plausibility of their providing benefit to society presses these reasonable people’s credibility beyond acceptable limits. That is significant.

Richard Murphy Domicile, Liechtenstein, Private equity, Tax Havens, Tax avoidance

The Independent reports that:

Simon Walker, chief executive of the British Private Equity and Venture Capital Association (BVCA), has warned that growing resentment of government tax changes could cause as many as 100 buyout firms to quit Britain for tax havens abroad.

He said that he was aware of an increased number of approaches from Swiss tax authorities to London-based private equity firms and added:

Just as Lewis Hamilton made his private arrangements on tax, some cantons are now targeting our firms and directors to move their headquarters to Switzerland. With them may go many of the investors they bring to the UK, and that’s not a comfortable thought.

Executives at Bridgepoint, Permira and Cinven also said they were aware of approaches by Swiss cantons to their companies and other private equity firms.

Now let’s be clear why this is just a bluff. First, he could actually only suggest two were really considering moving. That’s not 100. It’s 98 short of 100. Second, Permira is already in Guernsey. In fact the capital gains of all these companies are already in 0% capital gains environments: Switzerland cannot beat that deal. Third, Switzerland does care about the OECD Code of Conduct on Business Taxation. Cutting deals for private equity companies would breach that agreement. Fourth, Switzerland is not the place to do private equity business: these companies would have to stay in London to do their work.

Let’s ignore this as a bluff, because that is what it is.

Richard Murphy Capital Gains Tax, Private equity, Tax Havens

Marty Sullivan at Tax Analysts has been continuing his work on tax haven abuse, this time turning his attention to the use of hedge funds in the Caribbean by US investors as a way of avoiding and evading tax.

As he notes:

Previously we reported that tax evasion by individual investors in offshore hedge funds was a relatively easy undertaking. Information about investors flows only in a trickle from these institutions to onshore tax collectors.

In the latest edition he calculates that there were a total of $1.43 trillion in hedge fund assets under management at the end of 2006 and of that sum assets under management in Caribbean hedge funds amounted to $746 billion at the end of 2006.

He goes on to calculate that at the end of 2006, $262.8 billion has been invested by individuals in hedge funds domiciled in the Cayman Islands, the British Virgin Islands, the Bahamas, and Bermuda.

I stress, and he stresses, that there’s nothing wrong with that. But, as he also notes:

it is a fact that if income is not independently reported by the source, the likelihood of voluntary compliance declines precipitously. IRS statistics indicate that income with little or no information reporting has a compliance rate below 50 percent (”Rap on Tax Gap - It’s No Snap,” Tax Notes, May 21, 2007, p. 711, Doc 2007-11600 , 2007 TNT 93-8 ).

This ratio is considered reliable. How much is lost then? Hard to know for sure, but whatever it is, automatic information exchange would stop it. Compliance rates then climb to rates in the high nineties.

That’s why we favour such information exchange. And there is no reasonable argument against it (treat that as a challenge if you like: I don’t believe it possible to actually argue the case).

Richard Murphy Private equity, Tax Havens, Tax evasion