Private-equity boom cools
Labour is heading for a showdown with the City, says Hannah Brenton for Politico. Shadow chancellor Rachel Reeves is targeting the bonuses paid to executives in private equity, venture capital and hedge funds.
Unlike bankers’ bonuses, taxed at 45%, a “legal loophole” means some payouts to private-equity executives are taxed as capital gains at a lower 28% rate. Reeves wants that to rise to 45%. Critics warn it could send “Mayfair’s millionaires” fleeing to other European financial centres such as Paris, where private equity is treated more favourably.
Large discounts
The private-equity industry started life as the financial “barbarians at the gate” in the 1980s. Fuelled by “decades of low interest rates”, it has since grown to become a major part of the financial system.
Private-equity funds invest in companies to grow their businesses, says Gavin Lumsden in The Telegraph, and generate returns by selling them at higher valuations – either on the stockmarket, or to another private buyer. Debt is often used to leverage gains. Supermarkets Asda and Morrisons are both owned by private equity.
While most of the industry is only accessible to big institutional investors, there are about 40 privateequity investment trusts whose shares are available through a stockbroker on the London market. Despite often “impressive long-term performance”, most trade at a steep discount to net asset value (NAV), a sign of investors’ wariness. That reflects “painful memories of the 2008 global financial crisis, when some funds crashed”, as well as distaste for often high charges.
The discounts also reflect “heightened scepticism toward private valuations”, says Ian Cowie for Interactive Investor. Because the assets of privateequity trusts are unlisted, “it is impossible to be sure what they will fetch when they are sold”. Investors thus tend to err on the safe side by taking a pessimistic view of valuations.
Despite criticism, “almost every major institutional investor in the world is investing more and more in private equity”, says Robin Wigglesworth on FT Alphaville. Such investments have “become the go-to strategy for any pension plan struggling to hit its targets”. Why? Because public equity markets are shrinking.
“The stockmarket isn’t as representative of the global economy as it used to be,” says Laurens Swinkels of the Erasmus School of Economics. Investment returns are migrating from public exchanges to unlisted “private markets” that can only be accessed via vehicles like private equity.
But while historic returns have been strong, the sector has become crowded. And debt – “the primary fuel” for private equity – has also become much more expensive. Private equity returns “may be much lower in the coming decades”.