|
BankruptcyNews
Junior Member
358 Posts |
 Posted - 30 July 2007 : 09:35:58
|
'Debt threat to economy' warning
The private equity industry's massive appetite for debt is potentially destabilising the economy, according to a parliamentary report that urges the Government to consider major changes to the way the sector and its wealthy executives are taxed.
The Treasury Select Committee warned that the massive growth of the industry came hand-in-hand with an exponential increase in debt, which was creating risks for Britain's wider economic system. It pressed the Bank of England to probe the potential consequences.
Business leaders at a meeting with the Treasury select committee concerning regulation and taxation of the private equity industry, private equity debt is risky' warning
The warning comes amid growing market turbulence, with many traders fearing we are in the midst of a credit crunch in which the flow of cheap money both in the UK and further afield comes to an end. The FTSE 100 had its worst points fall in half a decade on Thursday as equity markets reacted to this threat, and many expect it to tumble further today.
The committee said its report was only an interim one, but it used the document to warn that the Government must reconsider the generous tax treatment of some of the profits made by directors and the fact that many of them can avoid paying millions of pounds worth of taxes by declaring their true home is outside the UK.
It came as a new study showed that the UK's position as a centre for private equity is growing faster than the US and other major European rivals. The report from financial services research group IFSL said worldwide investments of UK private equity firms rose by around a quarter on a like-for-like basis to £21.9bn last year.
However, the Treasury committee warned that this growth had also pushed up the indebtedness of UK corporations, since private equity often increases the leverage of companies it takes over. Its chairman, John McFall, said: "No matter how extensive the due diligence conducted, higher levels of leverage may still create additional risk, which becomes more significant the more important highly-leveraged firms become in the economy.
"The trend towards greater leverage has occurred during a period of economic growth and stability, which is not guaranteed to continue."
A number of fundraisings for private equity takeovers, including that of Alliance Boots, have run into trouble in recent weeks, as investors become more reluctant to fund debt.
The report recommended that the Treasury reconsider the tax treatment of both the private equity firms and their partners, who can pay taxes of only 10pc on many of their personal earnings, due to a quirk in the treatment of capital gains.
Among its other recommendations was a call for the creation of an independent monitor to ensure that the industry is complying with guidelines laid out by Sir David Walker in his recent review of private equity.
Damon Buffini, managing partner of Permira and one of those quizzed by the committee, said: "Permira acknowledges the importance of this report and we agree that there are issues that need to be addressed."
TUC general secretary Brendan Barber said the report chimed with many of the unions' concerns.
"Even in stock market falls of the last few days, commentators have pointed to the role of private equity in introducing instability," he said. "If this is cautious and interim, the final report could well be a humdinger."
Source: telegraph.co.uk
See my Blogs:
http://bankruptcynews.blogs.bankruptcyhelp.org.uk |
|
Debt threat to economy warning
