Tax

Private equity executives often re-invest past gains in new deals

Training course provider: Let’s find out what you’re seeing in those articles. Ollie, one thing that you could see which was vaguely interesting?

Delegate: That… that… that there’s a third way that the private equity…

Training course provider: There’s a… there’s another way that private equity can make money. Look, we know what they’re doing; buying low, selling high; we know they’ve got these carried interest bonus arrangements in place; what’s another way that they make money, Ollie, that you’re reading about?

Delegate: It’s themselves; their own money alongside the fund’s money.

Private equity tax

Training course provider: They invest their own money alongside… alongside the fund’s money. And in fact this has kind of led to some controversy. Matt, I don’t know if you’re aware of some of the controversy, certainly in the UK, around tax rates for private equity executives. Have you heard this? Yeah, what was the…

Delegate: Yeah… income tax.

Private equity executives’ remuneration can be taxed as a capital gain rather than as income e.g. at 40%+

Training course provider: OK. So Ollie, if you had been lucky enough to have been working in private equity – I don’t know what sort of bonus you got last year; probably your bonus was to keep your job, right, was it?

Delegate: Something like that, yeah.

Training course provider: OK, but in the good old days if you had got a bonus, what tax rate would it have been taxed at?

Delegate: Erm… forty percent.

Training course provider: Forty percent, OK… at the… at the higher rate, in the UK, if you’d done a great job… if you’d done a great job and got paid a big bonus: forty percent. If you’d been lucky enough to have been working in private equity and have these bonus arrangements that we have talked about, because from a tax point of view it’s looked at as being an investor – so you’re an executive who’s invested in the business – Matt, what would you have been taxed at?

Delegate: Er, it’s… actually it’s eighteen percent now [Editor’s note: since increased in 2010 UK budget to 28%].

Capital gains tax rates have increased in the UK

Training course provider: Well it’s gone up because the controversy was such. It was ten percent. You would as… working in the private equity exec… industry, if you sold well… if your businesses sold well you got this bonus, not taxed at forty percent: it would have been taxed at ten percent. And there was one private equity executive – I think he was an ex-Apax guy, and I’m sure he’d made enough money along the way because he felt free to say – and I’m sure he’s not popular with his fellow private equity friends, colleagues, ex-colleagues – he said he paid more… he paid less tax…

Delegate: Than he paid his cleaner.

Training course provider: …than his cleaner. You remember this one?

Delegate: Yeah.

Training course provider: He paid less tax than his cleaner because of course if you’re on the lower rate you’re paying ten percent; and of course he was on this lower rate as well. And of course the Government reacted against that and increased tax rates, but hit a lot of businesses other than just the private equity ones. So you’re absolutely right, Ollie; one of the ways that the individuals make money is through these bonus arrangements, and the controversy has been to do with tax rates.

More private equity training course material

Next the introduction to private equity course considers the identity of firms’ own investors.