Ferguson defends tax rules on loans

The chairman of UK private equity investor SVG Capital says changes to the tax deductibility on interest payments on leveraged loans would be damaging to private equity funds and their investors.

Nicholas Ferguson, chairman of UK private equity fund investor SVG Capital, has joined the chorus of industry professionals warning the UK Treasury not to make any adverse changes to the rules on tax deductibility of interest payments on debt used in acquisitions.

Nick Ferguson

Ferguson said in an interview with PEO: “The most damaging move the Treasury could make is changing the tax deductibility available on interest payments on debt. It would lower returns for the millions of pension funds that benefit from private equity. Nobody can deny we have added millions to their returns.”

Critics of the industry argue that the current tax treatment on loans used in acquisitions is inappropriate. The British Parliament’s Treasury Select Committee, which held a series of high-profile hearings on private equity this summer, is currently deliberating possible changes to the fiscal regime governing private equity in the UK.

Despite the ongoing debate, Ferguson said he did not expect the Treasury to make any dramatic changes to the existing rules.

Ferguson declined to comment on the question of tax relief on carried interest paid to private equity professionals. Earlier this year, he made headlines after suggesting in an interview with the Financial Times that UK private equity executives were paying less tax “than a cleaning lady or other low paid workers”. The quote has helped trigger a campaign against rules on capital gains allowing private equity executives to pay as little as 10 percent tax on carry.

Asked about current market conditions, Ferguson said he was optimistic about the future prospects for the asset class, despite the problems in the credit markets.

He acknowledged that the change in sentiment amongst debt providers would have an impact on the buyout business: “It is expected that banks will lend smaller amounts against target companies’ cash-flow. This will have an effect on the ability of private equity managers to complete deals, which will in turn affect pricing of transactions and may lead to a slowdown in the volume of new deals as pricing adjusts, a normal feature of this period of the cycle.”

However, he also expressed confidence that in a downturn, private equity would continue to do better than the public markets. During the crisis that followed the bursting of the technology bubble in 2001, SVG’s portfolio had outperformed the UK and US stock markets significantly, he said.