June 3, 2007 10:00 pm

SVG chairman breaks tax taboo

Nicholas Ferguson, one of the most prominent figures in Europe’s private equity industry, has broken the sector’s taboo on tax by criticising the fact that top buy-out executives “pay less tax than a cleaning lady.”

A number of European countries, including the UK, have capital gains tax rules that allow executives at private equity firms and some hedge funds to enjoy lower tax rates than most other people, often of only 10 per cent.

This has been targeted by a recent trade union campaign against buy-out firms.

“I have not heard anyone give a clear explanation of why it is justified,” said Mr Ferguson, the chairman of SVG Capital who built Schroder Ventures Europe almost from scratch before it became Permira, now Europe’s biggest private equity fund.

His comments, made during an interview with the Financial Times, come just weeks before five of Europe’s top buy-out executives face a grilling from the Commons Treasury select committee inquiry into private equity.

Mr Ferguson said he “found it a little strange” that the committee had not invited leading investors in private equity to give evidence, as it would not have “a complete picture of what is going on” without hearing from the owners.

He also criticised investment banks for offering private equity firms so-called “cov-lite” loans, dispensing with the covenants linked to operating performance usually attached to corporate debt even though such loans benefit the firms. The increasingly common practice is “a bad thing”, he said.

As a 25-year veteran of private equity and chairman of SVG Capital, the biggest investor in Permira’s record €11bn ($14.8bn) fund with a commitment of €3.8bn, Mr Ferguson’s comments carry weight in the industry.

“Any common sense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low-paid workers, that can’t be right,” he said. However he warned any policy change should not jeopardise private equity’s role in the economy.

The UK Treasury is reviewing its capital gains rules amid union protests over favouritism to private equity. The issue is also attracting scrutiny in the US.

Private equity general partners are paid a base salary but earn most of their money from “carried interest” – typically a 20 per cent share of any profit from selling portfolio companies after a certain threshold. So-called “taper relief” rules allow the tax paid on this income to be reduced from the top capital gains rate of 40 per cent down to 10 per cent as long as the private equity firm holds the company for two years before selling it.

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