Sir

Daniel Schäfer’s two articles about tax and returns of private equity — including reference to research done by London Business School — show that the debate urgently needs to differentiate between large funds and those funds that support SME’s, particularly in the UK: as the research and its authors make inferences that aren’t relevant to SME Private Equity:

• SME Investing is all about growth and does not rely as significantly on using debt; and on average each company is built up painstakingly over 4 or 5 years, creating bigger and better businesses
• Management in SME buyout funds raising say £300mn every 4 years or so; are required to invest say 2% or £6mn alongside investors in order to participate in the ‘20% Share of profits’ arrangements; these investments cannot be funded out of annual taxed income; the profit share is only paid out after all the £300mn plus an annualised 8% return has been repaid to investors — perhaps 6 years or more from the start. This arrangement entails managers putting real capital at risk in advance of a possible long-term capital gain
• For our funds invested and realised in the years 2000 to 2007 — we achieved more than 2x the return after all fees and profit share than if the same money had been invested at the same time/period in the AIM index — for this investors gave up 25% of this surplus return above AIM to the manager
• Our funds were all invested in UK companies with 85% of the money invested coming from non-UK investors
• Right now many SME’s can’t raise the money they need from banks or public equity investors so private equity often fills the void

Too much additional tax and regulation could be counterproductive for SME’s that need private equity.

Philip Buscombe
Chairman