The History and Future of Private Equity

This week’s commercial awareness topic is private equity - specifically its history and possible future. 

Private equity has invested around £43 billion into more than 3,200 UK companies in the past 5 years alone. As such, its importance to the UK economy is demonstrated by its creation of more millionaires than the UK National Lottery has ever produced. This has only been possible by the UK’s acceptance of, Jonathan Blake’s tax structure in 1987 (now Herbert Smith Freehills’ lawyer), where private equity dealmakers have their pay-outs (named carried interest or ‘carry’) taxed at capital gains, rather than income tax.

However, a challenge facing the UK’s private equity market is the threat of capital gains tax (‘CGT’) being raised in line with income tax. This comes after the Office of Tax Simplification (OTS) branded current CGT rates “odd” and “counter-intuitive”, potentially forcing carried interest to be charged at 40-45% rather than 20-28%. The effect for the Exchequer – an extra £14 billion, according to HMRC, to mitigate the fiscal chasm created by COVID-19. For private equity, a probable exodus from the UK to ‘safer’ nations like the USA, offering tax structures with only 20% rates. As such, the Chancellor of the Exchequer commissioned a review into CGT in July 2020. 

Yet, the picture for law firms and their clients is not so bleak. The developing trend where private equity houses run their target companies for 10, rather than 5, years provides an opportunity. Especially considering Bill Dodwell’s, Tax Director of OTS, comment that “Tax is a political choice”. Hence, private equity lawyers now have the capability to advise their clients to run target companies with more eco-friendly practices, diversity schemes and worker entitlements. As such, private equity houses could set the industry standard for workers’ rights and be seen in the eyes of the electorate as a force for good, not just profit. Hence, the threat of capital gains tax reform would diminish due to a lack of political will.

Although raising CGT in line with income tax escaped the government’s March 2021 Budget the threat still remains. ​​Thinking critically about private equity’s place within the wider financial market is useful as many students often express an interest, but fail to explain exactly why they find the work private equity lawyers do interesting. 

Private Equity in Action:

One of our sponsor firms, Kirkland and Ellis, have recently advised Hudson Pacific Properties on plans for new world-class film and TV studios in the UK.

Funds managed by Blackstone Real Estate Partners and Hudson Pacific Properties acquired a 91-acre site, 17 miles north of central London, through a joint venture for £120 million. The acquisition, with an expected total investment of over £700 million, will be the partners’ first expansion of their Sunset Studios platform outside of the US. The proposed development, subject to planning permission, would create one of the largest film and television studio campuses. The project is expected to create over 4,500 permanent jobs for Broxbourne and contribute more than £300 million annually into the local economy. Prime Minister, Boris Johnson commented on the deal saying, “This investment is excellent news for the UK’s film and TV industry … [and] for the people of Hertfordshire”.

Kirkland’s team was led by London partners Annette Baillie, Jonna Thomson and Los Angeles real estate partner Al Stemp.

Read Kirkland and Ellis’ press release about the deal here.

Further Reading:

What is private equity? What do private equity lawyers do?

· https://www.allaboutlaw.co.uk/stage/areas-of-law/private-equity-law

· https://www.investopedia.com/articles/financial-careers/09/private-equity.asp

Private equity in the UK market:

· https://www.ft.com/content/3771030c-b8ad-4da6-b0af-0311a8e82ec8

· https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf, pages 33-35.

· https://citywire.co.uk/wealth-manager/news/private-equity-is-changing-the-face-of-capitalism-in-the-uk/a1346586

Kirkland & Ellis and its private equity work:

· https://www.kirkland.com/news/press-release/2021/08/kirkland-advises-fox-on-gordon-ramsay

· https://www.kirkland.com/services/practices/transactional/private-equity