Nick Ferguson, chairman of UK-listed investment group SVG Capital, has criticised the tax relief on carried interest that allows buyout executives to pay “less tax than a cleaning lady”.
In an interview with the UK newspaper Financial Times, Ferguson said: “Any common sense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low paid workers…. can’t be right.”
Under the current rules, the money that private equity executives earn from carried interest – the portion of profit they earn from buyout deals, normally about 20 percent once certain thresholds have been passed – is treated as capital gains. Taper relief rules allow the tax on this to be reduced from the top rate of 40 percent to as little as 10 percent, while any investment losses can also be offset against this rate.
Ferguson was sceptical about arguments put forward by the Confederation of British Industry and the British Venture Capital Association, among others, that increasing the current rate of capital gains tax would cause firms to move offshore. “Anyone who wants to live in Guernsey can do so already,” he said.
Ferguson’s views carry particular weight as he is one of the leading figures in the UK private equity industry. He was the chairman of Schroders Ventures, the forerunner of European buyout firm Permira, and remains the chairman of SVG, the biggest single investor in Permira’s funds.
His remarks will provide further ammunition to trade unions, political opponents of the industry and other competitors who have argued recently that the private equity industry enjoys an unfair advantage in the current tax system. This has compelled the UK Treasury to launch a review of the current capital gains tax rules.
However, one city source played down the controversy, suggesting that the interview did not give a fair reflection of Ferguson’s views. “The remarks have been taken out of context in a lengthy interview.”
Ferguson was also reportedly critical of investment banks for offering covenant-lite loans to fund buyouts. These loans allow the borrower greater independence from lenders, who are not allowed to intervene if a company’s financial situation deteriorates. These loans have become increasingly common, with $16.6 billion (€12.3 billion) made in April, according to a recent report by Standard & Poor’s.
Nonetheless, Ferguson still believes that the property sector is at much greater risk of a credit crunch than private equity.
Ferguson also argued that recent criticism about private equity’s record on job creation is spurious. “I have never seen a private equity deal state its intention is to create employment. But equally you will never see that from the likes of BP and Shell,” he said.