BVCA statement on corporation tax
Responding to an article in the Financial Times speculating that private equity backed companies deliberately structure to avoid paying corporation tax, Tim Hames, Director General of the BVCA, said:
"Private equity has invested £60bn of pounds into more than 3,000 UK companies over the last five year to help them grow, create jobs, and return capital to our pension fund investors. The tax deductibility of debt interest encourages this growth and investment and lowers the cost of capital for our portfolio companies, 90% of which are SMEs. It is wrong therefore to suggest that this policy is used for tax avoidance. There are already numerous anti-avoidance measures in place to ensure that interest payments are deductible only for legitimate business reasons. Additionally, there is little incentive for private equity to use interest deductibility in the way it is suggested in the article - research shows that returns are generated primarily through operational improvement and not through financial engineering."
Notes to editor
- The British Private Equity and Venture Capital Association (BVCA) is the industry body for the UK private equity and venture capital industry. The BVCA has approximately 500 member firms, representing the vast majority of UK-based private equity and venture capital firms and their advisers.
- A study by Ernst and Young How do private equity investors create value? A study of European exits, E&Y, 2012 examines how PE investors create value at portfolio company level - PE value creation came from driving business improvements in its portfolio companies, evidenced by strong productivity growth. It also came from carefully selecting, and backing, the businesses and management teams that had the greatest potential to produce a step change in value.
- A further study - Private Equity Portfolio Company Performance through the Recession (Nick Wilson, Mike Wright, Louise Scholes, 2011), shows stronger economic performance in PE-backed buyouts, both during and before the recessionary period. The report concludes that PE-backed portfolio companies generally have higher leverage but at the same time these companies show a stronger and stable performance, and an interest coverage ratio that allows them to perform better even in during weaker economic conditions.
