ALEX BRUMMER: Private equity bosses must pay

Labour has pledged to tax those who can afford it. Among Rachel Reeves’s known targets in her budget on 30 October are private equity barons.

The prolonged undervaluation of UK stocks compared to their New York peers means that London-listed companies have offered great buying opportunities. There has been a lack of resolve in government and among regulators to protect companies from public to private ownership.

This has been particularly unfortunate for utilities. The financially-driven ownership of Thames Water is the most grotesque example. Once companies disappear into the universe of private equity, it is almost impossible to track their progress.

There is no control by shareholders and the interests of consumers, workers and suppliers can be neglected.

Until Asda fell into private hands, it was one of Britain’s most admired grocery chains and a genuine competitor to its low-cost German rivals Aldi and Lidl. Now it is struggling with a mountain of debt.

Elsewhere, pet lovers who complain of excessive bills may blame rising prices on private equity ownership.

The presence of American barons and their British imitators in London has helped fuel the City’s continued success after Brexit.

The Global City 2023 report, co-produced with Her Majesty’s Treasury, estimated that private equity and venture capital activity generated £32 billion of revenue for the financial services sector in 2022 – almost five times more than its nearest rival, Singapore.

Data from London-based Prequin shows that private equity firms currently hold about £2 trillion of capital, giving them enormous firepower. Last week, New York-listed Blackstone invested £12 billion in its biggest foray into Australia with a bid for data centre operator AirTrunk.

Here at home, there was the sinister sight of one of the UK’s tech innovators, Poppy Gustafsson, hastily leaving Darktrace after it was taken over by US private equity firm Thoma Bravo. Predators have taken too much of Britain’s high tech overseas.

The way the richest private equity tycoons are taxed is highly controversial. “Deferred interest” is the mechanism used by the sector’s bosses to reduce their tax bills.

Capital gains are paid by “passing through” the profits from transactions, which are taxed as capital gains rather than income.

Beneficiaries earning tens of millions of pounds can pay capital gains tax at 24 per cent instead of the top income tax rate of 45 per cent. Chancellor of the Exchequer Rachel Reeves is targeting this loophole in her bid to stabilise the public finances. Ed Balls and Gordon Brown considered a crackdown on carried interest during the last Labour government but backed off.

The big question for Reeves is whether a higher tax on carried interest would be counterproductive. CVC, which recently listed on the Amsterdam Stock Exchange, argues that such a tax could cause it to shift its base. If all private equity firms decided to do the same, would they take investment banking, law and other firms with them? One suspects not.

The UK’s financial services ecosystem is so robust that it could probably survive the shock. And, who knows, monopoly property prices in Mayfair might fall.

Taxing wealth is, in general, a terrible idea because it penalises investment. The low taxation applied by the robber barons of private capital is unfair. Or, as one prominent financier told me last week, it is “a scandalous distortion of economic interest”.