The mark-to-market accountancy rule imposed on financial institutions which says they have to value assets at the price they would get for them in today's market, is hammering the private equity companies and scaring off their investors.
Among those private equity companies which have had to re-value their holdings downwards are:
Blackstone which had to cut the value of its holdings by 30 per cent
Candover which had to cut the value of its holdings by 50 per cent.
Terra Firma cut by 45 per cent
Permira cut values by 36 per cent (with five companies valued at zero).
KKR's Dutch-based fund cut values by 45 per cent.
These re-valuations are having two wonderful effects:
- Private equity is doing far fewer deals meaning that situations where fine companies were loaded up with crippling debts - as in the case of NXP and Freescale - are much less likely to happen.
- Investors in private equity companies are trying either to get their money out, or to get undertakings it won't be used in new investments, both of which should see private equity companies go to the wall.
The private equity companies were encouraged into their activities by being allowed special tax advantages given to them by governments.
It is to be hoped that these tax advantages will be removed by law and that, in future, it will be made illegal for investor-groups to get together, buy a company, then load it up with crippling levels of debt.
David
You mention "special tax advantages" but there were no such things. It is true that - like all businesses - KKR et al can claim interest as a business expense to reduce tax.
But that applies to any and all businesses: from a sole trader borrowing to buy a van, through to a company borrowing to build a factory.
Of course, that same rule equally enables an individual to reduce tax by borrowing for a "Buy to Let" property, or for a company to reduce tax by borrowing for acquisition.
I'm not sure there is a solution.
We could stop tax deduction for all interest, but will that hurt "honest traders"? Should we tax people who are investing in the future of their business, and instead encourage them to live for today?
After all, KKR et prime skill is finding loopholes in the rules.
Perhaps banning "unfair" borrowing of all kinds? That is the biblical position: in Shakespeare's time loaning money was so sinful no Christian could do it (hence Shylock) and Islamic banking still prohibits usury.
Roberto, on the PE tax point I think the main tax concession they get is that they can charge the profit they themselves take as capital gains under the same tax rate as that afforded to entrepreneurs building a businesses. The PE people call this profit 'carried interest' as though it had some special quality absolving it from ordinary company taxation. The rate can be as low as 10 per cent which is why one brave City soul said the PE people pay less tax than his office cleaners.
The other concession PE companies get is, as you mention, the right to charge the interest they pay on the loans they load on the companies they acquire, against the profits earned by the companies. This may be standard business practice, but it unfortunately encourages PE companies to load up their acquisitions with creakingly heavy debt burdens - ie. $10 billion on Freescale and $6 billion on NXP - both companies with annual revenues around $5 billion.
George Osborne pointed out last week: "Economists have long pointed out that our corporate tax system favours debt financing over equity financing. I believe the time has come to look again at the generosity of tax deductibility on our corporate tax system."
So the Tories could change this. To me it seems wrong, morally and economically, to give fiscal encouragment to PE companies to buy up productive real economy companies and then cripple them with debt.