More money, more problems

As Rob Kotecki points out in his round-the-world round-up of regulations looming over the private equity industry, governments everywhere seem to have a paradoxical approach to private equity – they say they want as much investment capital as possible but insist that the price of admission is higher taxes, stringent transparency and a deck staked in favor of local competitors and prized industries.

As Winston Churchill once joked to a political rival: “Whenever you see something large, you want to nationalize it.” This partly sums up private equity's experience with regulators. If you're buying middle-market businesses and backing early stage ventures, you experience governmental benign neglect. If you buy national banks and companies with thousands of unionized employees, as private equity firms now do, the regulators will want to have a word with you.

Particularly in the West, private equity firms face regulatory challenges that could affect the profitability of the partnership. Most obvious among these challenges is tax, as governments debate what the most appropriate levy on carried interest is.

Less specific to private equity, but just as important, are the shifting sands of tax treaties. The idea that all the partners of, say, a London private equity firm, would move to the Channel Islands is a non-starter. But many of the structures employed by limited partnerships use off-shore domiciles, and some of these are scrambling to avoid being blacklisted as tax havens. Among the rule refinements are to what extent an entity's managers need to have a physical presence in the fund domicile in question.

Not to be disregarded is the sheer hassle factor that accompanies new regulations, even if the financial impact isn't much. New rules create new boxes that need to be checked with every transaction and fund close, highlighting the need for well-informed, well resourced firm managers like yourself.

Enjoy the issue,

David Snow