Private equity searching for deals despite uncertainty over tax, incoming AVCAL chairman says

Private equity says the downbeat economic environment is presenting plenty of opportunities for the industry, but is calling on the Federal Government to provide certainty over a long-running tax issue sparked by the sale of department store Myer by private equity giant TPG.

The comments from David Brown, the incoming chairman The Australian Private Equity & Venture Capital Association, come amid a suite of private equity offers for sharemarket-listed companies, including cleaning group Spotless and homewares and clothing group Pacific Brands.

Brown told SmartCompany this morning he believes private equity firms are still uncertain about major tax issues, which were brought to light after the Australian Taxation Office chased TPG for a major tax bill following the Myer float.

“We feel that while there is more certainty now, or more clarity now, the issue is certainly not over. There is still a grey area of what is an income or capital account, and that’s a fundamental issue.”

“It would be in the best interests of any Government to provide some certainty there.”

The ATO attempted to hit TPG with a $450 million tax bill, but has been unsuccessful so far. The issue has caused uncertainty among private equity players but Brown says activity still continues – especially during a downbeat economic environment.

“I’m not sure deal activity isn’t correlated with activity in the economy,” he says. “Oddly enough, this kind of environment can be good for deals.”

There have been some major bids from companies including PEP and KKR, while anecdotal evidence suggests smaller private equity players are keen on buying as prices drop.

“Deal activity is correlated with buying opportunities, and tough times can be a fertile ground for private equity. This is one of the reasons it can be counter cyclical.”

The activity isn’t necessarily isolated to one part of the economy, Brown says, and notes that even though larger players are still uncertain about tax issues, they aren’t letting anything stop them from making money.

“You can’t keep a good man down, I suppose, and this is a great industry for delivering returns.”

“What I think we’re seeing now is the fruits of what’s happened in the past couple of years, where there has been work developed around the certainty of tax and other issues.”

“People are just getting on with business, and not letting that uncertainty stop them.”

However, Brown says there is still work that needs to be done.

“I think we need to have a look at the legal structures we are using, to compare that to other vehicles around the world and then look at what we’re doing to encourage more investment in Australia.”