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The fair and efficient functioning of markets is achieved through transparency. A basic tenet of capitalism is that shareholders make informed decisions about the true performance of a public company, and the incentives of its executives, only if they have all material information. The ability of Bridgepoint — which this summer became the first private equity firm to list on the London Stock Exchange since 1994 — to not disclose the total amount of money its executives take home makes a mockery of the system. Bridgepoint has flouted no rules, and indeed its prospectus was approved by the financial regulator. But that points to a systemic flaw that needs fixing if the UK’s markets are not to attract companies that want to reap all of the benefits of a listing without its obligations.
At the heart of the problem is carried interest, the “20” in private equity’s “2 and 20” fee structure: management fees of 2 per cent, plus 20 per cent of any profits from investments over a set amount. Bridgepoint publishes its senior executives’ salaries and bonuses. It has also disclosed its total amount of carried interest, just not the amount received by individuals, including William Jackson, the executive chair. It argues that carried interest is distributed through corporate entities that the listed group does not control. This potentially keeps the bulk of money individuals received undisclosed: consider Bridgepoint’s listed US rivals such as Blackstone, which disclosed that its chief executive, Stephen Schwarzman, received $78m in “carry” last year, in addition to his $350,000 salary.
Bridgepoint’s supporters say carry is not income and therefore not captured by UK disclosure requirements. Aside from the transparency shortcomings, this points to a bigger problem that successive governments have failed to grasp: since the infancy of private equity, carry has been treated on both sides of the Atlantic as a capital gain rather than income — so subject to less tax. UK attempts at reform have stalled because of competitiveness worries. But in private equity’s biggest market, the US, efforts to close the loophole are gaining momentum. If President Joe Biden is successful in his contentious reforms, the UK should think again.
Arguing that carry should be taxed differently misses the point when it comes to public companies. Carry’s treatment as a capital gain has not stopped US regulators insisting that public companies disclose it as part of executives’ total compensation. The Financial Conduct Authority, as the UK’s listing authority, requires companies disclose total remuneration and benefits in kind of senior managers “for services in all capacities to the issuer and its subsidiaries”. There is no good reason why the FCA should not take a similar position to its US counterparts in requiring carry to be disclosed. A current consultation on premium listing rules, as well as a parallel review by the government of the prospectus regime post-Brexit would be a good opportunity to address the issue.
Another constituency should also do better: institutional investors, who have helped propel Bridgepoint’s shares to 45 per cent above their listing price. Private equity’s assault on listed UK companies this year has prompted much hand-wringing by fund managers. They have been among the most vocal in calling for a levelling of the playing field for private equity, including around carry’s tax treatment. Their remuneration teams, which demand a “say on pay” at listed companies must be just as forthright when it comes to demanding more transparency around carry. A vote ignorant of the bulk of what a company’s senior managers may take home is no say at all.