Rachel Reeves’ carry tax hikes are sensible, says private equity boss

Rachel Reeves’ plans to tax private equity partners more onerously are sensible and concerns about them triggering an exodus of dealmakers from London have been overdone, a private equity boss has said.

Rami Cassis, chief executive and founder of private equity boutique Parabellum, threw his weight behind the chancellor’s plans to bring carried interest – known as ‘carry’ – in line with capital gains tax, on the provision that partners who don’t finance 10 per cent of fundraising from their own capital.

“I’m not quite sure what Reeves’s final position is going to be, but I could see sense in carried equity being treated… more onerously, ” Cassis told City AM. “In my mind, if we’re objective about what carried equity is, it’s not that dissimilar to a management bonus that employees get when they perform and achieve their targets, [and] that is taxed at income tax rate.”

What is carry?

Carry is one of the principle ways that private equity partners pay themselves, and is taken from the profits of a private equity fund after investors have received their return.

But unlike performance-related bonuses paid in other areas of finance, carry is taxed as a capital gain at a rate of 28 per cent, considerably lower than the 45 per cent income tax rate that applies to performance-related bonuses in other areas of finance.

The Labour Party pledged to close what it has branded the “carried interest tax loophole” in its pre-election manifesto, claiming the move would raise up to £500m for the public purse.

But the plans have caused considerable disquiet from those in private markets, with dealmaking giants like the La Liga and Six Nations investor CVC Capital Partners warning against the change, and Jonathan Blake of Herbert Smith Freehills comparing the effect it would have to that wreaked by Brexit.

Cassis’s comments are at odds with many in his sector, but his proposal, which would keep the favourable tax rate for bosses who risk their own capital in funds, is similar to the latest reports emerging from the Treasury.

In June, Reeves signalled that Labour would extend the more gentle tax treatment of execs where fund mangers put their own capital at risk.

“If an investor or private equity professional were to invest their own money… that, to me, would encourage more entrepreneurial behaviour and less financial engineering,” Cassis said, adding that doing so would encourage genuine wealth as opposed to firms bolstering a firms accounts and shipping it on without creating wealth.

“Whereas there are private equity firms out there that are genuinely trying to drive growth, there are others out there who say they drive growth but you can tell that they don’t because the first thing they do is overload the business with debt, and everything is about initially cost cutting and driving up EBITDA [earnings before interest, tax, debt and amortisation],” he added.

Concerns of private equity exodus ‘are overdone’

The dealmaker, whose buyout shop invests in enterprise software and business services firms, also said that warnings of an exodus of private equity firms from London, which has traditionally been a hub for the sector, would not come to pass.

“I think those concerns are overdone,” he told City AM. “I’ve been around a lot internationally and London has a lot of attraction as a hub. “[It] is a truly international city that has phenomenal quality of education, infrastructure, legal system and investment opportunities.”

And addressing worries that Milan might overtake the UK capital as a hub for new funds were Reeves’ tax plans for the sector go ahead, Cassis said: “London also the gateway to the US. Good luck trying to do a deal with the US out of Milan. The UK market is something America understands. That isn’t the case with Italy or France. I can tell you that other than fashion there’s not much else going on in those industries.”