Actually, that’s grossly unfair. Friday saw another brace of lively missives in the FT’s letters column — focusing on Guy Hands recent contribution to the debate over private equity.
Lord Turner, the former CBI director-general, treats us to a little bit of tax history, pointing out that the current controversial rules only came into force in April 2002, while Mr Hands was discussing a private equity industry built over 20 years, by “eminent figureheads” who established the UK as “the prevalent centre for private equity in Europe.”
“Given that the industry initially flourished under a tax regime that did not involve any taper, even for very long-term investment, the burden of proof is on those who argue that a taper to as low as 10 per cent after just two years is now essential to its success,” Turner declares.
Meanwhile, Alastair Green, of software group Choreology, takes issue with Mr Hands’ implicit suggestion that PE managing partners are risking their own capital in the same way as primary investors.
“This masks the critical fact that the division of the profits of a fund is proportionate to the carried interest stake (typically 20 per cent), but the economic input required to acquire that stake is vastly less than 20 per cent.
“The 2003 Memorandum of Understanding between the then Inland Revenue and the British Venture Capital Association describes how this is achieved. As little as 0.01 per cent of the fund value is subscribed as capital into a limited liability partnership. The managing partners contribute 20 per cent of that capital sum. The remaining 99.99 per cent of the fund’s de facto investment capital is loaned on an interest-free basis by the primary investors. The managing partners do not subscribe (risk) any further funds as loans, but they ultimately receive 20 per cent of the final profits of the fund, if it is successful.
“For a $1bn fund which returns $1.5bn after management and other charges and costs, this implies that a $100m profit can be obtained for a nominal investment of $20,000 in the ‘carry’. Mr Hands may call that a reward for ‘risk capital’, but most people would call it a very, very large employee bonus.”