What the UK's general election could mean for private equity

For the third time in the space of two years, the United Kingdom is heading to the polls, this time to elect the government that will see the country through its Brexit negotiations and the proposed three-year "transitional deal" or "implementation phase" that follows thereafter.

As unquote" went to press, polls suggested it remains likely the ruling Conservative Party will obtain a majority in parliament, despite seeing its lead half to a single-figure percentage within the space of a month. What has become abundantly clear is that the Liberal Democrats, which had looked to capitalise on frustrations of so-called EU "remainers", will not be in government come 9 June. Barring a historic sea change in public opinion, the next British prime minister will be the Conservative or Labour leader.

It is perhaps unsurprising that the Labour Party has identified private equity as one of the potential targets in order to raise an additional £50bn in tax. In particular, the party says it would raise £700m per year by closing the so-called "Mayfair tax loophole" – in essence treating carried interest as income rather than capital gains and clamping down on those avoiding tax through non-domiciled status. It is fair to assume that not many in the UK private equity space will look favourably on this proposal.

Furthermore, the party plans on lowering the threshold for the 45% income tax bracket from £150,000 to £80,000 and introduce a 50% rate for earnings over £123,000 per year. In addition to the impact this would have on senior private equity practitioners themselves, it is also argued the – admittedly modest – increase in income tax might prove damaging to portfolio companies when it comes to attracting top international talent. Compounded by a commitment to raise the main rate of corporation tax to 26% – still lower than the 28% level when the coalition government took office in 2010 – Labour is being portrayed by some as "anti-business".

The Conservative manifesto has an Achilles heel – in a global race for talent and innovation, UK firms risk being left in the starting blocks because of a blunt approach to immigration" – Carolyn Fairbairn, Confederation of British Industry

Yet while the private equity and business community appears to favour a Conservative leadership for the next five years – as has historically been the case – the current ruling party is also making promises that would likely prove detrimental to the country's economy. In particular, its manifesto reiterates a focus to bring net migration to below 100,000 people per year. This is not only a promise the Conservatives have repeatedly broken but, in a country struggling to deal with an ageing population, one that is also widely regarded as economically counterproductive by academics and business leaders themselves.

Indeed, the Tory's manifesto received a mixed response from Carolyn Fairbairn, director general of the Confederation of British Industry. In a written statement, Fairbairn said: "With the world watching, now is the time to send a clear signal that the UK is open for business. Firms will be therefore heartened by proposed targeted R&D spending, planned corporation tax reductions and a commitment to act on business rates. But the Conservative manifesto has an Achilles heel – in a global race for talent and innovation, UK firms risk being left in the starting blocks because of a blunt approach to immigration."

Yet one area of the Conservative's manifesto that received praise from Fairbairn is the promise to bolster the funds and remit of the British Business Bank in order to plug the funding gap left behind by the loss of access to European Investment Fund backing. The sentiment is one that is reaffirmed by the British Private Equity & Venture Capital Association (BVCA), which said in a statement: "This has been a key position of the BVCA and is a very positive development for venture and growth capital funds, as well as entrepreneurs and startups across the country."

Whichever party ultimately wins a mandate from the British public, there will be many challenges in the years ahead as the UK withdraws from the EU. Should Theresa May win her first mandate to lead the country through those turbulent times, there will be many within the private equity space who will breathe a sigh of relief. Yet even a Conservative leader would be well advised to take greater account of the concerns of business leaders.

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