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Some facts on investment

Thursday, 21st June 2007

Anatole Kaletsky is full of sense - and facts - on the ridiculous fuss being made over private equity at the moment:

The largest study of British private equity deals, published late last year by the Centre for Management BuyOut Research at Nottingham University Business School, showed that employment had risen by 21 per cent on average after four years, although it did dip typically by 5 per cent in the first year after a buyout. It also showed that productivity almost doubled in this period and that product innovation and investment increased.

Embarrassingly for the trade union campaigners, the Nottingham study “found higher levels of employment, employee empowerment and wages” after these deals. To put it another way, private equity deals have turned out, on the whole, to be not very different from many other restructurings performed on sleepy British businesses since Margaret Thatcher launched her privatisation programme. All these restructurings, going right back to British Telecom in 1985, were opposed by the unions and initially by most employees, but in the end many of them produced not only more profitable companies, but also in many cases better working conditions and higher wages for the employees who remained.

As for the tax privileges of private equity investors:

It turned out, on closer inspection, that the unions’ criticisms of private equity companies as taxpayers applied to all private companies in Britain. What the unions were really calling for was a fundamental reform of the entire British corporate tax system – and one that would move directly against the pro-investment tax reforms adopted by successive Chancellors since the early 1980s and particularly by Mr Brown, who deliberately made debt financing more attractive to all private companies in his very first Budget ten years ago.

After suffering this setback, the opponents of private equity have been left with only one genuine argument – the tax privileges enjoyed by the employees of private equity firms as individuals. Here the critics have hit on a more promising issue, since a 10 per cent marginal tax rate does seem overly generous for multimillionaires. But again they run into the problem that the private equity partners’ advantages are just a specific case of a general tax relief that Mr Brown deliberately created for all investors in all private companies, to widespread and justified acclaim.

What a depressing commentary it is on the state of opinion and politics today that ignorant attacks on private equity are not simply laughed out of court.