Scrutiny over private equity sector

David Worsfold, Secretary, All Party Group on Insurance and Financial Services

Private equity has burst on the national consciousness with a vengeance in the past couple of months. The sector has made an art form out of keeping its head down and when it was forced above the parapet it has been found sadly wanting.

Appearances before a hostile Treasury Select Committee were not part of the plan, and the leaders of the sector have been ill-prepared for the onslaught that has confronted them. This has already cost Peter Linthwaite, the boss of the trade association - the British Venture Capital Association, his job, and the sharp differences of opinion between the heads of the major private equity firms have played into the hands of those who believe that a harsher fiscal regime needs to be imposed on this sector.

Most of the rest of the financial services sector is sitting on the sidelines, thinking this does not have much to do with them - and that the worse that can happen is that a few private equity fats cats get a big tax bill they can easily afford to pay. This could be a trifle naive.

These political bandwagons tend to roll and the Treasury Select Committee tastes is not going to be inclined to let up the hunt. The question then becomes, what next?

The most immediate implication of any new tax regime will be that the complex market forces that surround the private equity sector will be realigned with some unexpected and unintended consequences. These will keep analysts and commentators very well employed over the next few months and make high profile private equity deals a little thinner on the ground - this could mean that headlines about making the likes of Peter Cullum multi-billionaires will not be top of the sector's priorities. More interestingly for the rest of us is the thought of 'what next' for those now reinvigorated in their hunt for 'unjustified' tax breaks.

Where will their attention turn? Tax havens and tax exiles have never been popular with the left, and many aspects of offshore domicile could come under scrutiny. This could have consequences for many insurance firms and fund management groups. It will make it harder to argue for a generous approach to the problems caused by rapidly rising property prices and the need to review the scope of inheritance tax and capital gains tax. The private equity row has changed the political climate so that attempts to lift large numbers of people out of tax regimes they should never have been in will be closely scrutinised, to see what extra advantages the so-called 'super rich' might also enjoy as a result.