City of London grandee Paul Myners has cautioned the UK government against greater regulation of the private equity industry. But he has also thrown his weight behind the growing campaign to tax carried interest as income, rather than capital gains.
Myners’ comments came in a written submission to the Treasury Select Committee ahead of its third meeting to discuss private equity next Tuesday. In the submission, he encouraged the government to take a “light touch” approach, suggesting that it presents “no systemic risk” to the economy. He believes that any issues – like company debt levels, fund management fees and governance – should be resolved by the market, not by direct government intervention.
He was particularly positive about firms investing in medium-sized businesses, which he said could “generally be regarded as being beneficial to the overall economy”. He urged the committee to take evidence from general partners operating in this segment, rather than the large buyout firms that have been the focus of attention to date.
However, he also argued that carried interest is “a reward for employment and management performance rather than risk-taking” and should therefore “be treated as income in the same way that bonus payments to employees in most other industries are treated” – with the exception of the gains on capital risked directly by the general partner. Myners believes the burden should be on the private equity industry to defend its current tax treatment – in contrast to many practitioners who believe they should not be expected to justify a fiscal policy that applies across the board.
In a wide-ranging and largely even-handed paper, Myners argued that private equity was, in itself, no better or worse than any other form of ownership. Some firms did cut jobs and investment, he admitted, but the same was true of all private and public companies. “Private equity is no greater threat per se to the interests of employees than other forms of ownership,” he said, warning the committee against “extrapolating individual examples into broader conclusions”. ”Most forms of ownership are symbiotic,” he added. “An economy will benefit from a plurality of choice.”
The industry’s current advantages in terms of its willingness to take on debt and its superior governance model could easily be replicated in other corporate structures, he said. He also pointed out that not all private equity funds yielded market-beating returns, stressing that there was a “wide dispersion of outcomes”, particularly between different managers.
Myners believes that the big returns of recent years are partly due to external factors like the ready availability of debt, and suggested that if credit tightens – or appetite for risk changes – the industry’s activity is likely to diminish. “Private equity executives are, for the most part, highly skilled technicians, but more expert in identifying and releasing value than in creating it,” he said. As such, he does not believe tax changes would significantly weaken the available talent pool.
Myners advised the panel to encourage Sir David Walker, the chair of the BVCA-sponsored working group, to broaden the scope of his enquiry: in addition to increased transparency about the source of portfolio performance, Walker should also be looking at reporting practices to limited partners – an area where he believes investors can be “quite lethargic”. Capital structuring on individual investments and the geographical source of funding for UK limited partnerships should also be examined, he added.
The City veteran said the industry had been poor at explaining its success so far, and suggested the Walker Group was an excellent opportunity to put things right. “Put simply, private equity is more likely to prosper if the industry has a positive image which will encourage others to invest and deal with it and will not cause alarm to employees, trade unions, suppliers, customers, regulators or legislators,” he said.
Myners suggested there may be a niche for a model that mixed “private equity disciplines and long-term ownership”, suggesting that the current time limitations on private equity limited partnerships may be driven more by the manager’s need to trigger carry payments, rather than pressure from investors.
The comments are likely carry weight, since Myners is one of the most respected figures in the City of London. He currently chairs property group Land Securities, the Guardian Media Group, the Tate and the Low Pay Commission, while his previous chairmanships include retailer Marks & Spencer, and private equity groups Bridgepoint Capital and Gartmore Ventures. He remains involved with the industry as a senior adviser to UK firm Englefield Capital.