I attended a very interesting breakfast meeting hosted by The Stone Club in association with Coutts. The topic was around private equity and it’s involvement within our economy, and how opportunities exist for it, as an industry, to help improve the position of British business. One point that was made right at the beginning was that while there is huge public outrage and hatred for all things financial, it is a very large industry employing hundreds of thousands of people and can’t be pigeonholed with the tyrants who brought the global economy crashing down. Yes they were reckless, and took risks with cheap credit, but remember private equity actually invests in business and hence can only reap the rewards from actual success rather than smoke and mirrors.
Private equity has always had a bullish reputation as its unrepentant goal has always been to make lots of money. But does this mean it deserves the hatred and does it in fact have a larger role in helping Britain out of the hole we currently find ourselves? There seems to be a general consensus that while private equity can be bullish it does make the businesses it invests in work harder and has actually saved companies during the economic downturn.
One business owner mentioned that when his business was publically listed he struggled to invest and grow his company, due to the changing ownership and diverse shareholders. However, now under private money, he has been able to invest and grow the business during a recession making the company even more successful in 2010. So while private equity may want more return, they understand a simple calculation, which is that more money comes from more investment.
It is a simple truth Government would be wise to take note of, and while it has no money to invest, there is bags of it outside the UK ready to be directed into British business. However while the tax regime remains so complex (we have the most complicated regime in the entire world), and rates remain high this money will not come into the UK. Our tax ranking compared against all the world economies currently stands at 84th, down from 4th place. So there are 83 economies better suited for investment before Britain and that is before you consider the fact that business is now global.
Apparently 80% of all private equity comes from funds outside the UK which will now dry up as Government uses tax as a political football and gives no certainty to the long term tax structure. There is obviously a requirement to lower taxes (which, it has been proved, will increase revenue for the Government), but more importantly the uncertainty is killing private equity within the UK. Most people don’t realise that investments are made for 5 – 7 years on average and hence require a stable structure to persuade investors to commit.
None of the above will actually cost the UK anything, and when the tax take for January doesn’t even cover outgoings for that month, there isn’t a moment to loose in making immediate policy changes. Another point raised was Government spending, and the necessity to reduce spending from 50% of GDP to 40%. Long term we need to bring that down to 30% to compete, once again, as an economic super power.