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A Year of Change02/01/2008. Source: SJ Berwin. Simon Witney
 There are many reasons why 2007 turned out to be an eventful one for European private equity - the fortunes of the market chief among them. But legal, regulatory and tax developments have certainly played their part, with Britain seeing more than its fair share of changes. A number of the reforms have actually been helpful - such as those designed to make it easier to list alternative investment funds in London, or those which simplify and reduce the burdens of company law. But many others have been damaging, and some (like "MiFID", the new pan-European rules on financial services) just painful and confusing, writes SJ Berwin's Simon Witney.
The year began with a sharper focus on private equity from regulators in the UK, but - despite noise in the media and from some politicians - the views of policy makers were reassuring. The incumbent government had done much to help private equity - and did not look ready to reverse its direction - and the UK's super-regulator, the FSA, was happy that its "light touch" approach to regulation in the sector remained appropriate and proportionate. But the pressure continued to mount, and a series of very public hearings during an investigation by the UK parliament made more regulation of very largest buyouts look inevitable. So when, in July, Sir David Walker - who had been asked to report on disclosure and transparency in the industry by the BVCA - issued his consultation document the environment was febrile.
The fact that the industry took this action itself - proactively, and with an independent minded and robust Chairman in Sir David Walker - has meant that the resulting additional regulation is aimed only at those firms that were the focus for public disquiet, and is flexible enough to accommodate individual anomalies and to develop over time. Although the final guidelines are voluntary, pressure on large UK based firms to comply is likely to be irresistible, and so in practice they will impose an increased compliance burden on large buyout houses, and they (and their portfolio companies) will have to disclose more information than is currently required. That burden is even higher since concerns about enforcement - which was one area where the consultation draft was felt by many to be lacking - were addressed by the establishment of a semi-independent monitoring group in November, which gives the code additional teeth. But the increased burden is a measured and proportionate response to the heightened interest in private equity, and should help the industry to survive and prosper in the coming years.
However, the media attention was, for much of the year, more concerned with the taxation of private equity than with its regulatory framework - and pressure on the government to act was increased when a prominent figure was reported to have said that some private equity executives paid less tax than their cleaners. To its credit, the government avoided an immediate knee jerk reaction. But when it did act in October, it prompted widespread criticism by announcing a simplification of the capital gains tax system, removing the "taper relief" introduced by the now Prime Minister, and replacing it with a flat rate of 18% on all capital gains. Apparently (and disingenuously) linking the change to private equity - although the change is self evidently much wider than that - the UK government appears to have satisfied virtually nobody. Failure to publish draft legislation last week, as promised, has led to rumours that there will be a (partial) climb down - but has also added to a general sense that the government is not fully in control. It will be important to reassert that control early in 2008, or further damage to the UK's position will undoubtedly be the result.
As an eventful year ends, the additional burdens that the industry faces in the UK - fiscal, legal and regulatory - should not be under-estimated. In some ways, private equity may be better equipped to face its future in the public spotlight but, overall, the last twelve months will have made Britain a little less attractive as a place to do business.
Simon Witney is a partner at SJ Berwin, a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 20 7533 2222 or visit our website at www.sjberwin.com.
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