The UK’s private equity predicament

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The UK’s PE problem: save jobs or reward indulgent behaviour?

The private equity business principally uses other people’s money. It is, after all, an industry that is addicted to debt. 

So it probably comes as no surprise that, despite sitting on $2.5tn of dry power — otherwise known as cash ready to spend — PE groups are angling for help from someone else to save their ailing companies: the UK taxpayer.

The British government, it seems, is listening carefully to their pleas. But the EU has thrown a spanner in the works, that has so far prevented the UK from handing out loans to PE-backed companies. The problem? Debt, of course. 

Many PE-owned companies haven’t been able to apply for UK government support because they don’t turn enough of a profit. That’s not just bad luck, it’s down to design. 

Let us explain: companies report something called an interest expense — that is, how much interest they’re paying on their debt — which is tax deductible. The more they borrow, the higher their interest expenses are. 

Even though the company may be generating cash to distribute to shareholders and creditors, it’s technically operating at a loss. The EU has said a company can’t get the loans if its accumulated losses exceed 50 per cent of its share capital. 

This debt-heavy financial model is nothing new. DD readers will remember that is exactly what had happened to Hawksmoor, the British steakhouse co-founded by Will Beckett, pictured above, and beloved by City traders.

Now the British government is waking up to PE’s plight. 

As DD’s Kaye Wiggins, Nicholas Megaw and Daniel Thomas report, the Business, Energy and Industrial Strategy department wants to find a way to help PE-backed companies that employ a lot of people. The concern here is more job losses after 750,000 have been left unemployed by the coronavirus pandemic. 

One PE lobbyist described the government loans as “more attractive and less onerous” than other types of lending. We’ll bet. They come with a guarantee that the taxpayer will repay 80 per cent if a company fails. 

The UK government is understandably caught between a rock and a hard place. If they let these companies fail, thousands more jobs are on the line. 

But if they open up access to PE-backed loans, it will face controversy for handing money over to one of the wealthiest sectors in finance. 

It has naturally become a hotly contested issue. The government is talking about giving taxpayer money to companies that have intentionally been structured to avoid paying taxes. 

It’s also perhaps yet another reminder that when PE wins, it’s the insiders that benefit. But its risks are borne by society. 

The FT’s editorial board argues that the PE industry has much to lose in the court of public opinion if it is seen to shirk its responsibilities in today’s crisis.

Pay: Larry Fink is miles ahead of most his peers

BlackRock chief Larry Fink has upheld his title as the top-earning asset management executive. 

© FT montage; Bloomberg

The financier has conquered a divided pay landscape where some of his opponents faced pay cuts due in part to weak active fund performance and increased public scrutiny on awards to industry leaders.

Fink was awarded a 5 per cent pay rise in 2019, as reported by BlackRock, taking home $25.3m in a year of record investor inflows for the group. (To give you some context, that’s close to double what T Rowe Price’s William Stromberg, the industry’s third-highest earner, took home last year.)

However, if you take into account the Securities and Exchange Commission’s disclosure guidelines, which left out performance-based stock awards made in January 2020, Fink made slightly less than he did in 2018, bringing in $24.3m.

The Financial Times chooses to report pay based on those accounting methods established by the SEC. Even still, Fink’s pay thwarted most of his adversaries by a wide margin. 

Change in chief executive pay in the asset management industry

But if you look at pay as a share of revenue, Fink’s salary doesn’t seem as outrageous compared to his peers at WisdomTree, Gamco, and elsewhere.

Chief executive pay as a share of revenues

It remains to be seen whether this year’s tumultuous markets will tilt Fink’s crown — BlackRock has bounced back from a rocky start to 2020, winning $100bn in new client funds during the second quarter.

Go deeper with FTfm’s analysis on pay in the industry.

GE’s alleged $1bn corporate tax fraud: a case of biblical proportions

Helping some of the world’s largest corporations pay less tax may be seen by some as “ethically dodgy”, says Will Morris, PwC’s deputy global tax policy leader.

It is an observation he has wrestled with in his side job as a part-time priest at St Martin-in-the-Fields in London’s Trafalgar Square. 

He told a congregation last year that when he was ordained he asked himself whether he was trying to throw a “priestly cloak” over a profession that has become a thorny moral issue.

Now it could grow thornier. The Liverpool-born former US Treasury official, pictured above, has become involved in a landmark $1bn tax fraud case brought by HM Revenue & Customs against General Electric.

Morris was one of five GE executives who helped negotiate a big tax break for the industrials company in 2005. He rose quickly through the ranks of GE’s famously effective tax department, and was promoted to director of global tax policy in 2007, moving with his team to PwC a decade later.

Now HMRC claims the tax relief GE was granted in the UK in 2005 was fraudulently obtained. Its case against GE will go to trial in 2021. GE has vigorously denied the allegations, calling the claims “false”. It has countersued in an attempt to force HMRC to drop the case.

Morris is not a defendant and no allegations of wrongdoing have been made against him but his high-profile reputation as a corporate tax adviser and lobbyist as well as his advisory role to the OECD business committee on tax could come under scrutiny.

The case could also be awkward for PwC, the “Big Four” accounting group, which now employs three of the GE officials and one of the HMRC executives involved in the 2005 deal, and which is defending GE at trial.

Companies utilising legal tactics to work international tax policy to their advantage is nothing new. But the case will see HMRC taking an unprecedented swing at a multinational corporation that is accused of employing potentially unlawful methods to avoid tax on UK soil.

It will be one to watch as debt-laden governments face pressure to shake down the corporate sector in the wake of the coronavirus pandemic.

Job moves

  • Former UK chancellor Sajid Javid has returned to JPMorgan, the bank where he first began his career, to join the US lender’s European advisory council. More here.

  • Finablr founder BR Shetty has resigned as director and co-chairman of the payments group, which is currently embroiled in an accounting scandal. 

Smart reads

Barriers to exit A Dutch plan to tax departing multinationals in search of cheaper jurisdictions is gaining momentum, muddying Unilever’s relocation to the UK. Critics have coined it the “Hotel California” law. (FT)

Xinomics The Trump administration’s haughty confrontations with China are more bark than bite as its anti-communist ideological tactics are underestimating Xi Jinping’s ability to reinvent state-run capitalism as a trade war weapon. (The Economist)

Pandemics are for poor people Hopping between safe zones on private jets, 15-minute coronavirus rapid tests served up at posh dinner parties, and extravagant fêtes in Palm Springs mansions — it’s all a day in the life of Silicon Valley’s billionaire elite. (Vanity Fair)

News round-up

Carlyle staff told to avoid public transport on London office return (FT)

Retail trading app Robinhood’s value tops $11bn on new fundraising (FT)

Sanofi agrees $3.4bn deal for Principia Biopharma (FT + Lex)

Kabbage sells to American Express after halting lending (FT)

Diageo to buy aviation gin, backed by actor Ryan Reynolds (FT)

Japanese officials sought a Nissan-Honda merger (FT)

ByteDance faces China backlash as Trump piles pressure on TikTok (FT)

Berkshire Hathaway slashes stakes in US banks (FT)

New York A-listers in $2bn bidding war to buy the Mets (FT)

SoftBank builds $1.2 billion Amazon stake; invests in Netflix, Tesla (Reuters)

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