BVK calls on industry to remain calm on regulation

Driven by the numerous crises of recent years, the regulatory landscape of Europe is changing and a strong political debate is taking place in Germany. Over the past decade, Germany has consistently been the third strongest market for European private equity, following France and the UK. But new policies that cater to the demand of stricter regulation of financial institutions are changing the German PE industry. The latest clamour demands an increase in individual capital gains tax, which could hit carried interest.

"There is a kind of hostility against the private equity industry among policy makers. At the same time, that might be incidental, because different actors have different agendas and so private equity just happened to be dragged into the centre of attention," says Hanns Ostmeier, president of the German Private Equity and Venture Capital Association (BVK).

Ostmeier argued that if politicians want to introduce tax breaks to boost the economy, those need to be offset by tax increases in other areas. Alongside the UK and Sweden, Germany is seeing multiple attempts to increase taxes at once, one federally and one at state-level.

The federal plan to reform the current standard 25% corporate tax rate with a 12-point plan could have an impact on the financing of acquisitions, including leverage. Simultaneously, the states of Hamburg, Hesse, Rhineland-Palatinate and Schleswig-Holstein are working on a reform of capital gains taxation which impacts fund managers.

Although both plans are still in their infancy, the potential impact of these policy changes brings uncertainty to the German market - and that will not help to bring mega-buyouts back to Europe.

But Ostmeier says that fears have been overblown: "In the end, German private equity relies on the same thing as the German industry altogether: small and medium-sized companies."

Nonetheless, it is difficult to estimate how the German private equity industry will perform in the coming year. Despite the gloomy economic situation, a boom in the mid-market is not impossible, due to the peculiar situation private equity is finding itself in at the moment. While new regulations tighten their grip on Europe's financial services sector, there is money sitting in funds that needs to be put to work. These contrary developments and the perpetual uncertainty created by the on-going eurozone crisis make it extremely difficult to forecast how the industry will fare in 2012.

In 2005, German social democrat Franz Münthefering called private equity houses locusts that attack businesses, grazing profits until there is nothing left before moving on to the next victim. His comment and the following ‘locusts debate' sparked a general scepticism around private equity firms and their business conduct in Germany.

Ostmeier says the poor public image of private equity is far more difficult for the industry to deal with than regulation. "The role of private equity in the economy and in society in general is not being valued at all."

Germany has had an agenda-setting role in European fiscal policies, pushing for the fiscal pact with regards to the Greek crisis, and now liaising with France in a tax convergence plan. The latter, published as a green book so far, would align French and German corporate and business taxation. Interestingly, it would broadly leave German legislation alone and increase French taxes.

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• Topics
• Regulation
• Germany
• BVK