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The year ahead16/01/2008. Source: SJ Berwin. Simon Witney 
According to the BBC's Evan Davis, speaking at an SJ Berwin reception in London last week, 2008 will most likely be a year when the European economy takes its medicine. January's detox will last all year, or perhaps longer, he thinks - but the treatment will ultimately do us all good. He does not think the pain will ease very soon, but also says it is not likely that the economy will tailspin into recession. Clearly Mr Davis is not alone in thinking that the year will be a difficult one. But - as the Chief Executive of the British Private Equity and Venture Capital Association (BVCA) also warned last week - life is going to be tough for private equity on several fronts. The media's barrage of criticism is far from over, politicians all over the Western world are not yet finished with the industry, and the unions are preparing for a year of campaigning - and have private equity firmly in their sights.
It is encouraging, then, that the BVCA has come out fighting. As well as arguing the case for private equity in its New Year message, last week it published its further evidence to the UK's Treasury Committee - the influential group of politicians who shed more heat than light on private equity last summer during a series of public hearings. That Committee picked up its enquiry again in December in a knockabout (and, at times, farcical) session with Sir David Walker, who published his guidelines on transparency and disclosure in November. More "evidence" sessions are expected during the early part of this year.
The BVCA's submission - which was actually delivered to the Committee in December - picks up a number of points raised in the Committee's interim report in July, and is wide ranging. It re-affirms the BVCA's acceptance of the Walker recommendations, saying that the levels of disclosure are "appropriate", explains its proposed monitoring and review process under the chairmanship of Sir Mike Rake, and confirms its appointment of Ernst & Young to collect and analyse data on large deals. Membership of the BVCA, it says, will be contingent on a firm signing up to the guidelines (if the firm is within the relevant size thresholds). The industry has therefore entered an era of self regulation, and the BVCA will have to adjust to fulfil its new role.
But the BVCA also tackles the issue of taxation, which has been a major focus for the Treasury Committee - as well as for politicians and the media across Europe and the United States. It restates that there are no special rules or secret deals for private equity; the tax system that applies to buyout funds and their managers is the same as applies to any other business or individual. The tax authorities have long been aware of the way that the industry operates, and have clarified certain aspects of tax law which were uncertain in their application to funds, but the fundamental principles are correct and should remain.
However, the BVCA criticises some aspects of the UK's tax system - arguing that the proposal to raise capital gains tax rates to 18% from April will leave Britain with a rate "higher than most European countries", and will damage competitiveness especially in the smaller companies sector. There are also concerns that other aspects of the UK's rules are too complex, and arbitrarily cover situations which should be excluded.
Throughout the debate on private equity, many have been left with the impression that there are special rules for private equity, and not just in the tax code. The BVCA evidence deals with two of those misunderstandings that were repeated in the Committee's interim report: the rules on pensions, and employee protections on a takeover. The BVCA points out very clearly that the rules are applicable to all, and raise no special issues in the case of private equity. For pensions, the UK's regulator has the same jurisdiction over buyouts as any other deal - and that jurisdiction is now extensive - and the employment protection rules that apply on a takeover must, of course, be respected by any private equity buyer.
Right across Europe this year, there will be important challenges to the industry. There is plenty of ammunition with which to repel these attacks, but it has to be mobilised effectively by an industry that has not always spoken loudly and clearly in the past. Although the economy may have to take some medicine, the private equity community has to demonstrate that - far from being the cause of the malaise - it is actually an important part of the cure.
SJ Berwin LLP is a pan-European law firm with a particular focus on private equity. It has offices in Berlin, Brussels, Frankfurt, London, Madrid, Milan, Munich, Paris and Turin. If you would like further information on our services to the private equity industry please contact Simon Witney (simon.witney@sjberwin.com) in our London office (020 7111 2222) or visit our website at www.sjberwin.com.
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