Wednesday, June 06, 2007


Brown Should Clear Up This Daylight Robbery by Private Equity Companies

Not being an economist, I've not really caught up with 'private equity companies' until recently when my businessman brother explained how they operate. The impression I gathered from his informed explanation was that they play fast and loose with the rules in order to make squillions of dosh. Yesterday Polly Toynbee provided yet more clarity through the fog for the ranks of the unenlightened.

Basically it seems these swashbuckling new players buy out public companies, which are subject to some common regulation and then use their new private status to inflict fairly blatant forms of exploitation. Boards allow private equity to take over often at the expense of workers' pension funds; 96 pension schemes have collapsed in consequence. The device is to take the company into liquidation, maybe for only 24 hours, to shed liabilities; pensioners thus robbed become a call on tax funded government compensation schemes. On average 20% of jobs are cut after such a takeover and workers receive £231 a year less than in equivalent public companies. Toynbee observes:

Mega money is made by the dealmakers but it is a weakened company which limps back to the market.'

and concludes

'Never mind the hard-won laws devoted to making public companies responsible: private equity is a return to primitive, unregulated capitalism'

But it is the tax breaks such companies exploit which cause the most anger:

Current tax breaks let private investors charge the interest from huge borrowings against profits. On capital gains they are not charged the usual 40% that applies to everyone else, but after owning the company for just two years their rate is cut to 10%. The two-year rule introduced in 2004, designed to help new ventures, puts ordinary public companies at a disadvantage , having to wait 10 years to pay so little.

It is this anomaly which led Nicholas Ferguson, chairman of SVG Capital private equity to remark recently that executives in his line of work 'pay less tax than a cleaning lady', a remark which won a headline for its author in The Financial Times. One has to applaud his honesty but when one of the robbers themselves complains his gang are receiving too much loot, there must be something seriously wrong.

So it is some slight(only 'slight', so great is one's cynicism regarding New Labour) relief to read today that Gordon Brown- previously a defender of this new branch of the finance industry- intends a 'crackdown' on such tax breaks once Ed Balls' review reports at the end of the month. Three candidates for the Deputy Leadership- Cruddas, Hain and Johnson, have also signalled their determination to remove unfair tax advantages.

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