Europe offers private equity a haven

As the UK's top buyout companies face a grilling, the likes of Switzerland are tempting them to jump ship. Danny Fortson reports

European governments have stepped up efforts to lure under-fire private equity firms to abandon the UK and relocate to their jurisdictions, where there is less public scrutiny and outrage at low taxes.

The news of increased lobbying efforts from countries including Switzerland, Luxembourg and Ireland comes as another group of the UK's buyout titans prepares for a televised grilling by a Treasury Select Committee on Tuesday. The committee will seek to clarify a raft of issues, like whether the industry presents a threat to pension funds and why many practitioners pay as little as 10 per cent tax.

A spokesman for the British Private Equity and Venture Capital Association said: "There are a number of countries working very hard to try and attract some of the UK's leading private equity and venture capital talent. It's really important that the UK industry is able to do all that it can to attract and retain the best talent in UK and in London. The waves of misunderstanding and hostility are shaking people's confidence that the UK is best place in Europe to conduct this industry."

Jon Moulton of Alchemy Partners, Peter Taylor, head of Duke Street Capital, and David Blitzer of Blackstone are all expected to testify this week.

Private equity firms, which control companies that employ one in every five private sector workers in the UK, have been demonised by unions angered at the job cuts and insecurity that sometimes follow takeovers. The unions also fear the market has reached a peak and that companies saddled with large amounts of debt by their private equity owners could go bust if an economic downturn takes hold.

That is just one concern likely to be addressed this week. More worrying, say pensions sector sources, is that private equity's reach will probably be extended dramatically within the next few months when new rules are expected to come into effect.

The Financial Services Authority last week ended the consultation period on its review of rules that govern investment groups. Of interest to private equity funds are "permissive links" - the legally defined limits on the sums that pension funds and other large investors can put into alternative assets, which include private equity and hedge funds. Broadly, pension funds still invest a paltry portion of their overall cash in private equity, usually less than 5 per cent. Buyout firms covetous of pension cash, and pensions funds desiring the better-than-average returns generated by private equity, have both been pushing for a loosening of the rules. This looks like happening this autumn.

However, some experts worry that pension funds will start investing just when the market looks close to its peak. Adam Bushby, a pensions lawyer at Lawrence Graham, said: "More money is going to go into private equity and hedge funds. Private equity transactions are highly leveraged, so the results may be that pension schemes will be at greater risk. The cliff face will be even higher if there is a downturn."

Newly minted Prime Minister Gordon Brown is facing mounting pressure to rejig the regulatory regime and tax treatment of the private equity industry. Pension insiders believe he could use the debate to his political advantage.

Possibilities include pushing for laws to grant pension trustees greater negotiating power in takeover talks. At present, they exert little influence. Requiring that trustees be at the table, especially when private equity firms are involved, at the earliest stages of takeover talks would give an added sense of security - but also increase the complexity of most buyouts. Moving company pension funds higher up the food chain of creditors is another option.

For an ex-Chancellor who has been pilloried for the changes he made to the pension system, granting such powers to the industry would be politically expedient. Most private equity insiders also acknowledge that some kind of revamp of the tax treatment is inevitable.

The select committee hearings will also provide plenty of theatre. Mr Moulton of Alchemy said: "They'll want to talk about pensions, about regulation and about tax affairs from 1953."