Comment: Regulation and tax pose dilemma for alternative managers
Will a combination of the UK's plans to increase taxation of the income and pension contributions of its wealthiest residents and the European Union's proposals to impose strict new regulation on hedge fund managers and private equity firms result in leading alternative investment players leaving for more welcoming domiciles?
The question is particularly pertinent in London, which is home to managers of up to 80 per cent of the continent's hedge fund assets and probably a majority of Europe's private equity business as well, after Guy Hands, founder of private equity firm Terra Firma, announced that he was off to Guernsey, while Crispin Odey suggested that his hedge fund management firm Odey Asset Management might move at least part of its operations to Switzerland.
The UK government has already been accused of putting London's position as Europe's alternative asset management capital at risk by imposing limits on the ability of wealthy individuals to declare themselves non-domiciled in the UK for tax purposes. Now the latest budget plans announced by Chancellor of the Exchequer Alistair Darling propose an increase in the top rate of income tax to 50 per cent for earnings above GBP150,000 and to remove some of the tax breaks offered for pension contributions by high earners.
Meanwhile, the European Commission - admittedly largely under pressure from member states and European Parliament members - has put forward draft legislation that would bring a broad swathe of the continent's alternative investment industry, not to mention a range of other funds that fall outside the umbrella of the Ucits states governing cross-border retail fund distribution, under regulations that managers say will increase their costs and hamper their investment activity.
To believe the mainstream media, you would believe that much of London's Mayfair is about to empty out as alternative managers find more congenial working environments outside the UK and the EU. Some undoubtedly will follow Hands to Guernsey, as well as Jersey and the Isle of Man, all of which are setting out their stall to attract high value-added parts of the fund industry as well as firms' principals as residents.
But the crown dependencies, with their relatively small populations and constraints on office space and housing, are not capable of accommodating a mass exodus from the UK. Indeed, their respective promotional agencies take pains to point out that their fund sectors complement London, rather than seeking to poach business from it. The same applies even more to more exotic jurisdictions that have been cited as possible boltholes for the industry, such as Monaco and the Cayman Islands.
Even Switzerland, which offers the capacity and infrastructure required by the industry and is already a global centre for private investment, is unlikely to fit the bill for most managers. True, the country has already lured a handful of alternative businesses from London, in addition to home-grown firms spun out of local banks and wealth managers. However, it is far from a tax-free jurisdiction for resident individuals and companies, and it remains to be seen whether Switzerland will follow the EU in adopting greater regulation of alternative funds, as it has with done other legislation in order to gain access to Europe's single market.
At a time when much of the world is leading a crusade against the supposed iniquities of so-called tax havens, it would be a surprising step by alternative managers to openly challenge the G20 countries by taking further steps to put themselves beyond their regulatory and fiscal reach.
This is not to deny that many managers will be examining carefully the benefits and drawbacks of their presence in London, simply that the arguments in favour of leaving are far from being as clear-cut as they might appear at first sight.
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