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Tax twist

AN UNFORESEEN TAX RULING SHOCKED THE UK PRIVATE EQUITY INDUSTRY. THROUGH AN UN USUAL ALLY, PRIVATE EQUITY IS FIGHTING BACK

It's a strange battle: a garden equipment manufacturer taking on the UK government on behalf of the private equity industry. But that is precisely the scenario resulting from Hozelock's decision to seek a judicial review of new tax laws that eliminate the tax deductibility of shareholder loans in private equity deals.

Hozelock was acquired by London-based buyout house CVC Capital Partners in a £245 million (€361 million;$442 million) transaction in February 1999. The date of the acquisition is significant, since the legislation aims to restrict tax relief in connection with interest payments on loan stock on all buyouts as far back as 1998.

According to a recent report in UK newspaper The Sunday Times, the Inland Revenue has claimed this retrospective action will result in one-off tax bills amounting to just £50 million – but a fuming UK private equity industry believes the true figure could be as much as £1.5 billion. One leading London-based buyout professional recently confided to sister magazine Private Equity International that the new tax laws could effectively trim as much as 1.5 per cent from the internal rate of return on an average deal.

The impact of the new laws was heightened by the suddenness with which they were introduced in March 2005. Says Michael Mowlem, a managing director at mid-market buyout firm Legal & General Ventures: ?Whilst there had been rumblings, it was announced with no notice. In our case, we were just about to send out an offer letter for a company and suddenly the whole environment had changed.?

The new laws also apparently caught the British Venture Capital Association (BVCA) unawares, as they appeared to renege on an agreement the BVCA thought it had struck with the Treasury to the effect that the private equity industry would be left alone. No wonder that a spokesman for the BVCA said he was ?eagerly awaiting the outcome of the judicial review. Whatever the Hozelock outcome, at least the industry has the satisfaction of knowing it has sprung a surprise of its own.

Permira hires journalist to IR team
Chris Davison, the former head of research at London-based private equity information provider AltAssets, has joined European private equity firm Permira. In his new role, Davison will be part of the dedicated investor relations and PR team headed by partner Philip Bassett. The team also comprises investor relations professionals Nicci Pedersen and Liz Martin and draws on in-house lawyer Peter Gibbs and accountant Greg Shirley. Commenting on the appointment, Bassett said: ?Chris brings a very interesting mix of skills to the table, particularly his background in journalism, strong writing and presentational skills as well as very strong relationships in the community. Before joining Permira, Davison spent three and a half years at AltAssets, the private equity-focused research and information business owned by Almeida Capital, the placement agent. Davison arrives at Permira at a time when many private equity firms are making efforts to build out their investor relations and communications platforms so as to effectively service existing and prospective investors.

RCT expands operations in multiple US offices
Research Corporation Technologies, a Tucson, Arizona-based technology investment and management company, has expanded its presence on the Atlantic and Pacific coasts, establishing new offices in Boston, Los Angeles, and Raleigh-Durham, North Carolina. RCT provides early-stage venture funding for biomedical companies and technologies with high growth potential. The new offices support the expansion of the RCT BioVentures investment program. Heading the firm's New England and mid-Atlantic activities will be managing director Michael

Berendt and associate Jeffrey Moore. Focusing on the Research Triangle Park area in North Carolina will be Doreen Grech, who will be the director of the Raleigh-Durham office. The Los Angeles office will be headed by director Paul Grand.

Blackstone enters heated European debt market
Another US alternatives firm has set up shop in Europe's hotly contested market for corporate debt management, with Blackstone hiring Intermediate Capital Group's Debra Anderson in London. Anderson was the leveraged loan portfolio manager for mezzanine capital provider ICG, where she managed roughly €1.4 billion in loan assets. Blackstone's corporate debt group was established in 1998 and is led by Howard Gellis in New York. The group manages some $4 billion in mezzanine funds and collateralized debt obligations. Signs abound that Europe's debt management business has been heating up of late. In July, Edmund Truell, the chairman of private equity firm Duke Street Capital, announced he would step down to focus on creating a debt-related fund management business.

OPIC seeks managers for Eurasia
The Overseas Private Investment Corporation, an overseas investing arm of the US government, is looking to invest in private equity funds with a Eurasian focus. The agency plans to place up to $100 million (€82 million) in vehicles making private company investments in Eurasia, including the Ukraine, Moldova, Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Armenia, Georgia, Azerbaijan and Russia. While Russia may be included in the fund strategy, OPIC's Call for Proposals says the agency expects a substantial portion of the investment activity taking place in neighboring Eurasian countries. The proposal also indicated OPIC would consider financing special-purpose vehicles to focus on the region from fund managers with a Russia-focused strategy. OPIC will contribute equity to the funds in the form of loans, according to Bill Pearce, a director at the agency. OPIC will provide up to 33 percent of a fund's total capitalization, the remaining commitments coming from traditional limited partners. Global institutional consultant Cambridge Associates is assisting OPIC with the evaluation process.

Goldman partner joins GSC in LA
GSC Partners, the alternative investment specialist based in New York, announced the hiring of Joseph Wender as a managing director. Wender was a partner at Goldman Sachs, where he worked for more than 30 years, according to a press release. He became a partner in 1982, and led the financial institutions group for more than a decade. Wender will be working from GSC's new Los Angeles office. GSC currently manages more than $8 billion in assets, including distressed debt funds, structured finance funds, mezzanine debt funds and private equity funds under the name Greenwich Street Capital. The firm was founded by Fred Eckert and Keith Abell in 1994. In March, GSC hired collateralized debt obligations expert Fred Horton away from Trust Company of the West. In a statement, Eckert said Wender would help ?identify new investment strategies.?

Delaware laws for LLCs clarified
As of August 1, the laws affecting Delaware ?alternative entities are amended. According to a memo from law firm Nixon Peabody the changes ?provide an important reminder for?parties to execute documents properly. Changes include a confirmation that an alternative entity's agreement is binding on its members and partners, regardless of whether those parties executed the agreement. They also include a mechanism whereby the dissolution of a limited liability company or a limited partnership can be revoked prior to certified cancellation. The amendments define what ?not doing business in Delaware means. This includes holding meetings; maintaining bank accounts; creating or acquiring indebtedness; doing business as an insurance company collecting debts and conducting a single transaction not part of a group of similar transactions.

KKR expands to Asia
Kohlberg Kravis Roberts has unveiled plans to open offices in Hong Kong and Tokyo, applying its powerful brand in that market for the first time. The move follows similar paths of other large private equity groups, such as Thomas H. Lee Partners and The Blackstone Group, both of which announced new Asian offices in recent months. Joseph Bae, a managing director at KKR, will head the firm's operations there, necessitating a move to Hong Kong that should occur at the end of the year. Justin Reizes, currently a principal at the firm, will join Bae. Reizes currently works from the firm's London office. The Asian markets will have a pivotal global influence in the coming decades. A spokesperson for the firm said there are not yet any plans to raise a separate Asian fund. The announced move comes alongside news that KKR partners Edward Gilhuly and Scott Stuart are retiring from the firm.