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(Bloomberg) — To hear people in the private equity industry talk publicly, there’s not a lot concern about any changes the UK’s new Labour government might make to a tax break they’ve enjoyed for the better part of four decades. Behind the scenes, though, the lobbying is intense.
The industry has just a few weeks to persuade Labour, which took over with last month’s election, that carried interest — fund managers’ portion of profits on asset sales — should continue to be taxed as capital gains rather than as income. If the UK government makes a switch, it’s likely to be big, boosting the tax rate for carry to 45%, the top rate for income, from 28%.
The challenge for private equity — which traditionally tried to avoid the limelight — is to make the case that the special perk should continue. Against a backdrop of tough economic times for the country and a rocky history for the industry, arguing for private equity’s contribution to society isn’t easy, especially now that the UK’s main left-leaning political party is in control.
Labour has set a short consultation, with submissions due by Aug. 30. Some in the industry are writing their own, but most say they are going through their trade group, the British Private Equity & Venture Capital Association, which is planning to emphasize jobs and the industry’s positive role in the economy.
“The private-capital industry makes a huge contribution to UK economic growth, supporting 2.2 million jobs and investing over £20 billion in UK businesses in 2023,” Michael Moore, the BVCA’s chief executive, said in an email.
Private equity is hardly the only sector of the finance industry seeking to influence Labour. Banks, asset managers and insurers have been talking to the party about ways to boost growth and a possible wide-scale overhaul of the pensions industry.
“I don’t say this lightly: in 30 years of campaigning, I’ve never seen financial lobbying having so much influence on government policy,” said Mick McAteer, co-director of the Financial Inclusion Centre, which advocates for under-served consumers, and a former board member of the Financial Conduct Authority.
Some in the private equity industry say they are focused on engaging with members of the new government about investment opportunities in the UK, and haven’t raised the topic of carried interest. But the mood privately is quite different.
There is talk of anger at Labour’s plans, meetings in Mayfair restaurants to come up with strategies including threats to leave the UK and discussions with lawyers to look at legal arguments. At the same time, industry leaders want to avoid triggering extreme measures such as an exit tax on wealthy people leaving the country, several people involved in the talks said.
Some are seeking help from advisers, especially those with strong ties to the Labour party. Several firms have hired Global Counsel, set up by former Labour minister Peter Mandelson, who remains a key figure in the party’s circles.
And there are encouraging signs that Labour has moderated its position, according to people with knowledge of the party’s thinking. And Labour, through its call for evidence, has indicated that it’s open to discussion on the matter.
New UK Chancellor Rachel Reeves attended a private dinner with Blackstone Inc. Chief Executive Officer Stephen Schwarzman during a trip to New York to see Wall Street bigwigs this month. Spencer Livermore, former chief strategist to Gordon Brown when he was prime minister and appointed growth minister for the Treasury by the new Labour government, has been meeting industry figures.
Reeves herself has shifted her position. After attacking private equity for “asset stripping” back in 2021, she’s now signaled that the new rules will distinguish between returns on individuals’ money put at risk and rewards with no personal risk. Policy changes will be “fair, transparent and justified,” the Treasury has said.
But as the Budget approaches, at the end of October, some in the industry continue to worry. Reeves has identified a £22 billion ($28 billion) black hole in the public finances, raising expectations for a range of tax hikes targeting the wealthy.
In addition to concerns about the degree of any changes, there are mounting fears that they could come immediately — and not when the next tax year starts in April. A quicker change would be sensible, according to Dan Neidle, founder of the Tax Policy Associates think tank.
“If it takes affect in April, there will be some exits beforehand, motivated by wanting to get the old carry regime,” Neidle said.
There are already signs of people speeding up sales that are already in process, according to one adviser to the sector, but private equity executives said they wouldn’t rush into unplanned transactions.
Since 1987, British private equity has had special arrangements for carry to be treated as a capital gain, on the basis it is an investment, not a bonus, giving it a lower tax rate.
For individuals, there is a lot on the line — 255 top dealmakers earned £2.7 billion in carried interest in the 2020-to-’21 tax year, the law firm Macfarlanes LLP said in a report last year. Labour believes it could raise £565 million in additional tax revenue annually by treating more carry as income, according to its manifesto.
Some in the industry are frustrated that the BVCA — its trade group — hasn’t managed to kill Labour’s carry plans, according to people familiar with the matter. That’s especially so given that the party is also wooing firms for investment and wants to unveil attention-grabbing announcements with the private sector at its investment summit on Oct. 14, two weeks before the Budget, the people said.
Tensions High
Others say that Moore, the BVCA’s chief executive, has done a good job of emphasizing the need for private equity to win public support and moving the debate away from historic associations with failing care homes and overly indebted high-street businesses.
Tensions are running particularly high as firms also await details of Labour’s workers-rights plans, which will have a big impact on the consumer-facing businesses several of them own — with implications for their own returns, the people said.
To gain closer ties to Reeves and Keir Starmer, the new prime minister, several private equity firms hired Global Counsel earlier this year, according to people with knowledge of the matter. The firms include CVC Capital Partners, Advent International and Apax Partners, with some planning to use Global Counsel to help with their carry comment submissions, the people said.
Representatives for CVC, Advent, Apax and Global Counsel declined to comment.
Of the more than a dozen private equity executives interviewed by Bloomberg News — all of whom asked not to be identified discussing such a politically sensitive issue — most said they were resigned to carried-interest perks being trimmed, and some said they knew the current benefits were unjustifiable.
In the industry, there’s also something of a generational divide. While some veterans who’ve made large sums during their careers were less concerned about paying more, younger executives expressed frustration at possibly missing out on the largesse.
According to Moore of the BVCA, it is “encouraging” that the Treasury has said the government will protect the UK as “a world-leading asset-management hub.”
Many private equity executives are foreigners, so Labour’s plans to cut perks for wealthy residents from overseas — so-called non-doms — could also impact the industry. Overall, the UK is expected to lose 9,500 millionaires in 2024, more than double the 4,200 who left last year, according to global migration advisory firm Henley & Partners.
Yet for all the talk of private equity executives fleeing the UK, the threats seem largely empty. Senior executives from the UK’s biggest private equity firms have expressed plans to stay put even if tax laws change — as have most of their team members, according to people with knowledge of the matter.
For Reeves, who’s searching for sources of revenue while wanting the UK to remain a center for capital and wealth, it’s a question of how far to go.
UK Competitiveness
Reeves needs to be mindful about overall competitiveness or the long-term impact of tax changes could be like Brexit, with people currently here not leaving but deterring new investors from coming to the UK, said Haakon Overli, general partner at venture capital firm Dawn Capital. He also believes Reeves should distinguish between early-stage investors like his company and those focused on leveraged buyouts of mature businesses.
“The government is keen on AI and technology,” Overli said. “It won’t be a big private equity fund that creates the next Google. It will be Dawn or Sequoia.”
If Labour does distinguish between different types of carried interest, it could lead to wider reforms that might make the industry more accountable.
“One reason why people are paid so much is because everything is so opaque,” said Peter Morris, an associate scholar at University of Oxford’s Saïd Business School and a former financier. That could be dealt with by forcing more public disclosure of which companies firms have invested in, what their returns are and how their fees are calculated, he said.
According to David Pitt-Watson, a pioneer in responsible investment as co-founder of Hermes Focus Asset Management and now visiting fellow at the Cambridge Judge Business School, private equity plays an important role in funneling investment into promising projects.
But if individuals get outsize pay packages, “it should be because they are doing their job really well,” he said, “not because of some ‘trick of the trade.’”
–With assistance from Swetha Gopinath and Ben Stupples.
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