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The poll debate: Time to give private equity a wide berth?

According to a poll over recent weeks, upwards of 60% of you think private equity is more, or equally, appealing following its recent tribulations. Right or wrong?

First (for anyone who doesn’t know), a quick rehash of what those tribulations are:

i) Lambasting by left-wingers Last month, Northern Ireland secretary and candidate for the Labour Party’s deputy leadership post, Peter Hain, joined forces with the GMB Union in accusing private equity funds of being ‘asset strippers’.

ii) Termination of tax relief The UK Treasury has announced a review to look at the way private equity funds are taxed. The big issue is the possibility of removing tax relief for interest costs.

iii) Recoiling from risk As investors’ appetite for risk wanes, the cost of debt could rise, making private equity deals more expensive to finance.

Ought all of this to make private equity a less perky career option? Yes, according to one senior leveraged financier. “I personally would not join a private equity fund at the mid-to-senior level right now,” he warns.

Higher risk, higher taxes, fewer investment opportunities – and lower pay

Why? “The vintage of the fund you’ll be getting carried interest in will be less,” he adds. “It will be investing its equity now, when purchase price multiples are at the highest they’ve ever been – earning a good IRR will be very challenging indeed.”

If tax relief on debt were removed (which he thinks unlikely), he says it could be disastrous: “If they didn’t have grandfathering provisions that meant existing deals could retain their current tax status, some investee companies would go under and default on their debt.”

Plus there’s the fact that some investments may soon be out of bounds. Last weekend, Michael Cohrs, global head of Deutsche Bank, enjoined PE funds to ‘stand up and engage’, and to steer clear of investing in infrastructure-type assets which are liable to touch a public nerve.

And then there are those (entirely unconfirmed) rumours that some PE funds clawed back carried interest payouts from partners when the market turned in 2002.

Busting a gut to join a private equity firm at this precise moment may not be such a good idea after all…

Comments (1)

  1. I am among a select number of low/middle PE professionals who have voluntarily left PE during the recent “boom” period.

    1) UK is mature – too many funds chasing too few deals. Europe still a good opportunity, but are you fluent in German/French/Italian & do you want to spend your life on a plane/in a hotel?

    2) the average age of people running the businesses continues to rise – and life is pretty good if you are a partner. Why retire? Implication – it will take a lot longer to get to the top.

    3) if/when you get there, will the spoils be there? Unlikely to be as much as today. Tax on carry most probably should change – let’s face it, it is income not capital gain and getting taper relief (effective 10% tax) is a complete wheeze. On a DCF basis, the NPV of a career in PE could fall dramatically

    4) Returns are not sustainable in UK -> propped up by the debt markets and an unparalleled period of economic conditions – US, EU and Far East all being in growth mode. tougher conditions will impact heavily on returns.

    5) Much hot money has flown into PE of late. Subsequent fund raisings will be challenging if the market takes a dive.

    6) big opportunity now is distressed debt

    got out while I could choose where to go Reply

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