As Philip Hammond takes up his post at No.11 today, British private equity professionals will want to know that the newly-anointed Chancellor of the Exchequer is well-briefed on the key issues facing the industry.
UK private equity is a major investor in British business: the industry invested around £5.2 billion in some 730 UK companies in 2014 (when net foreign direct investment inflows into the UK were around £44 billion) and more than £30 billion in some 3,900 UK companies over the past five years, according to the British Private Equity and Venture Capital Association.
Hammond has said that he is well aware of the concerns of the financial services industry post-Brexit. Speaking at the British Bankers’ Association summer reception on Tuesday, the former foreign secretary said that the financial services industry “is probably the most directly affected” by a Brexit, adding that the UK government “will do our bit to get you the certainty you crave”.
Here are five key issues that the Chancellor should aim to tackle in the coming months.
1. ENSURING ACCESS TO THE SINGLE MARKET
A key priority for the industry in the immediate future is whether the UK’s future relationship with the EU includes access to the single market.
Although a lot of private equity funds are run out of Luxembourg and other tax-efficient locations, access to the single market “matters for portfolio companies, because one source of exits is big European corporates buying companies in the UK,” Florin Vasvari, professor of accounting at London Business School, told Private Equity International.
So far, this is looking promising, at least from the UK’s side. In a clear bid to reassure the City this morning, Hammond told BBC Radio 4’s Today Programme that “we have got to make sure in our negotiations with the European Union we have very clearly in our minds the need to ensure access to European Union Single Market for our financial services industry.”
2. SETTING A NEW REGULATORY AGENDA
No longer under the yoke of EU regulations, the UK has the opportunity to shape its own regulatory framework. For those in the industry who found the Alternative Investment Fund Managers Directive overreaching, a regime with less emphasis on reporting and disclosure will no doubt be welcomed.
“Reporting – I don’t know what purpose it serves, really, to regulators, because it’s still not made public, and it just adds a lot of costs to run a fund,” Vasvari said.
These costs raise the industry’s barriers of entry for new managers, who have to deal with a hefty regulatory burden up front.
“It makes the existing managers bigger and stronger because they don’t get the competition they used to,” Vasvari said. “For a first-time manager, it’s very difficult to raise a fund in this regulatory environment.”
3. IMPLEMENTING TAX INCENTIVES
Funds domiciled in the UK are currently taxed twice, at the fund level and at the investor level.
“That’s why people go to Luxembourg, because there’s no taxation on the fund level,” Vasvari said.
If the UK were to drastically lower or cut taxation at the fund level, then it would greatly incentivise fund managers to domicile their funds here.
There could also be some incentives with regards to stock options, which are often offered to managers of portfolio companies and are currently taxed as income.
“If one wants to incentivise investments and risk-taking, then this is not really the same type of income as the income one would get from a consulting activity,” Vasvari said.
A lower tax – more in line with capital gains tax – would incentivise investors to take more risks, which would be beneficial for businesses.
4. LOWERING CORPORATE TAX
Earlier this month, former chancellor George Osborne pledged to slash corporation tax from 20 percent to less than 15 percent in a bid to soften the impact of Brexit by enticing non-UK investors. Whether Hammond will see through this pledge, which would make the UK one of the major economies with the lowest corporate tax rate, remains to be seen.
“It should make the UK a more attractive investment environment for private equity,” Vasvari said. “That would certainly attract non-UK investors.”
5. SECURING THE AIFMD MARKETING PASSPORT
The UK’s exit from the EU would mean UK fund managers would no longer have automatic access to a pan-European marketing passport under the AIFMD, making marketing funds to European investors much more complicated than it is today. Pushing for an extension of the passport to the UK should, therefore, be high up on the industry’s agenda.
“That will allow fund managers in the UK to also raise money in Europe, and a lot of European pension funds are underinvested in alternative assets,” Vasvari says.
Whether the UK is granted a passport – and how quickly it will be granted – depends on industry lobbying, Vasvari said.
“We have a lot of alternative asset managers in London, and I think the lobby will be very strong, so I’m optimistic but, again, there’s no guarantee.”