Will Private Equity Overtake Public Equity - Term Paper Example

Private equity groups like Slater-Walker in the 1960s and Hanson Trust in the 1980s have been providing an alternative form of financing to public financing for many years now. These were the first firms or conglomerates that tended to fiancé slumping companies and turned them around for cash generation. These private equity firms were seen as corporate saviors, which helped to revive poor performing firms and gave big returns to shareholders (BBC, 2006). Yet there may be downsides to private equity financing and in one recent analysis and news report, by Times, private equity companies are to face major tax deductions.

The Times reported that firms financed by private funding may have to pay millions of pounds in extra taxes as commissioned with changes by the Treasury and Revenue & Customs. The report suggests that such heavy tax burdens can be a downturn for an industry that has created millionaire bosses. The tax rate on capital gains is set to rise from 10% to 40% (Timesonline, 2006). According to the report, private equity firms own companies that employ more than 20% of the UK private sector workforce.

The Somerfield and Debenhams are major companies in the UK backed by private equity. Private equity bosses carry compensation packages of £2billion a year so sudden tax burdens could go up to a few million pounds. However despite this sudden tax problem, which may have to be resolved by the BVCA, it is important to analyze why private equity firms have recently been more attractive than public equity firms and why has there been an exodus of top executives who moved from public companies to privately financed companies within the UK and indeed in many other emerging markets of the world.

According to a recent cover story by Businessweek Online (Feb 2006), more and more of business firms are keeping away from public companies because of the ‘money, freedom and glamour’ of private companies.