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A law with few friends

Germany's coalition government is working on a new law on private equity. A number of drafts have been published, but no one seems to be getting excited.

After years of uncertainty over how private equity funds based in Germany should be taxed, the government is determined to finally deal with the issue once and for all. Over the course of the year, the Ministry of Finance has published a number of drafts of a law on the subject, the socalled Private Equity Gesetz. Still pending, the law has already achieved notoriety, and throughout the process the government's efforts have met with fierce criticism from a range of parties.

Frustrations about the government's most recent proposal to limit tax breaks for German private equity funds to early-stage investment funds with less than €20 million ($28 million) under management has been expressed not just by those who would suffer the most obvious set-back ? eneral partners of funds in excess of €20 million of equity. Germany's private equity trade association, the BVK, has described the Ministry's stance as a ?missed opportunity? in that it failed to create a framework in which the whole industry could flourish, rather than just a small section of it.

Equally critical noise has been coming from the German buy side. The Bundesverband Alternative Investments (BAI), which lobbies on behalf of institutional investors participating in private equity and other nonmainstream asset classes, published a statement in September, urging the government to throw out the draft altogether and start from scratch. In a letter to Federal Finance Minister Peer Steinbrück in September, the BAI described the pending law as ?wholly inadequate? to finally bring about the kind of tax transparency that private equity funds in Germany depend upon in order to attract institutional capital.

The BAI reminded Steinbrück that according to the European Private Equity and Venture Capital Association (EVCA), Germany already had one of the least conducive legal and fiscal frameworks for private equity investment in Europe. If the Ministry's current plans were to become law later this year, the BAI expects institutional investment in German funds to decline, despite German businesses having ?a significant need for private equity funding.? Ultimately, believes the BAI, the German economy as a whole would suffer.

It seems unlikely that the BAI's intervention can succeed. According to private equity professionals, the finance ministry's refusal to promote later-stage private equity funds in Germany is underpinned by political quarrelling between the two parties that make up the country's coalition government. Steinbrück's left-of-center Social Democratic Party (SPD) is more sceptical of the benefits of financial investors operating in Germany than Chancellor Angela Merkel's Christian Democrats (CDU).

With both parties looking to position themselves ahead of new elections, private equity, in the words of a Munich-based fund manager, has become ?a political football.?

This football is being kicked about frequently by the country's senior politicians. Peter Struck, the leader of the SPD faction in the lower chamber of the German parliament, recently told journalists that in addition to the pending law on taxation, Germany needed laws to help its corporations in strategically important sectors protect themselves against the growing influence of financial investors ? including private equity and hedge funds. Limiting private equity ownership of German businesses to 25 percent might be appropriate to keep out the ?locusts?, Struck suggested. He also said his party was ready for a confrontation with Merkel and her party over the issue later this year.

In the meantime, the debate over private equity taxation looks set to continue. Ironically enough, the Private Equity Gesetz appears to have failed to impress even the closest allies of the SPD: Germany's powerful trade unions. Their bone of contention is of course a very different one: IG Metall, which has more than two million members in metal-processing businesses, thinks the idea of promoting funds with up to €20 million in commitments way too generous. IGM would much rather dust off an earlier version of the law ? the one in which Steinbrück and his colleagues had envisaged a limitation on tax breaks to funds with as little as €500,000.

Schumer tax hike for all industries, not just private equity
New York Democratic Senator Chuck Schumer has followed up on his critique of the current carried interest bill by proposing a far more widespread tax hike covering all industries, not just private equity. Higher tax rates would be applied to similar partnerships in all US industries. The new bill would tax carried interest at ordinary income rates across all the sectors, applying to all ?2-20? partnership structures, commonly used by REITs, private equity and venture capital firms, as well as timber and energy businesses shops. A spokesman for the Senator explained to Reuters that he favors this approach as it is ?broader, fairer and will raise more revenue than targeting only publicly traded partnerships.? The current proposals for tax reform on carried interest are limited to private equity and hedge funds alone, or in another alternative, only those investment firms that go public as a publicly traded partnership.

SEC, exchanges target insider trading
The US Securities and Exchange Commission and investigators from several US stock exchanges are teaming up to better combat what is seen as a new wave of illegal insider trading. The new ?scheme teams? are drawn from the Financial Industry Regulatory Authority, the Options Regulatory Surveillance authority, the NYSE Regulation and the SEC. According to the NYSE, the number of irregular hedge fund trades was 88 last year, up from 20 in 2002. An article in Reuters last month put the number of such irregular trades at 56 so far this year. As the volume of deal activity has dramatically increased, so too have the number of participants privy to insider information. An increasing proportion of total public market M&A activity has involved private equity sponsors.

Abu Dhabi appoints COO
Abu Dhabi Investment House, the United Arab Emirates state sponsored investment vehicle, has made two senior hires to spearhead its push into Europe. The firm named Matthew James as chief operating officer and Mahmood Samy Naib as chief development officer. Naib will run the group's real estate department functions and strategic planning for the development sector, while James will take a more general leadership role. Previously, James was European controller at DB Zwirn, where he was responsible for setting up and running the European finance division. He has also held senior positions in various organizations including Schroder Ventures and DLJ Phoenix Private Equity. Prior to his job with Abu Dhabi, Naib worked in real estate development and program management at Skidmore Owings & McClier, Turner International and Parsons. While the fund size of Abu Dhabi Investment House's Al Arabi Private Equity Fund is undisclosed, it remains fully invested and targets an IRR of 20 percent over five years.

Hong Kong's Search hires CFO
Search Investment Group, a major LP to the alternative investment market, has hired John Williamson as a chief financial officer. Williamson joins from Morgan Stanley, where he was head of infrastructure and operational risk for Asia. Prior to that he was COO of NatWest Securities Asia. Williamson has been a member of the Clearing Consultative Panel of Hong Kong Exchanges and Clearing. Last year, he joined the Hong Kong Securities Institute as a board member. According to Asian Investor, Williamson will be responsible for budgeting, internal controls, treasury activities, legal and tax coordination. Search is the family office for the Miller family, which built its fortune through the Duty Free Shoppers retail outlets. The group controls Squadron Capital Advisors, a fund of funds manager.