Labour's gains in London have private equity looking to exit — the country

LONDON — With the British Parliament back from recess, the U.K.’s Labour Party will start working to push through aggressive changes, including controversial proposals that would force the rich to pay more in taxes.

Labour won a resounding victory earlier this month. Now, as party leaders prepare to make due on their campaign promises, some of London’s elite are plotting to skip town and cross the English Channel for what they see as friendlier pastures elsewhere in Europe.

In June, the Labour Party published its 135-page campaign manifesto. Led by Keir Starmer, who is now prime minister, Labour vowed to raise $9.4 billion over the next few years through a combination of measures, including closing tax loopholes and slashing other tax breaks. Some of the proposals squarely take aim at the country’s private equity sector, which, despite Britain’s exit from the European Union, has maintained its stature as the regional hub for deal-making.

“Private equity is the only industry where performance-related pay is treated as capital gains,” the manifesto says. “Labour will close this loophole.”

In practice, that would mean taxing carried interest, or the profits paid to private equity and hedge fund managers, as income. The tax rate would spike to 45% from the 28% paid for capital gains.

Lars Faeste, chairman of FTI Consulting’s EMEA team, said such changes would lead to a “brain drain over time.”

“While many established PE professionals will stay in London, new top professionals — of which many will be expats — will be sensitive to a carried interest tax change,” Faeste said. “Many PE professionals have a light anchor and are global citizens, which means they can just leave.”

The Labour Party, which describes itself as “pro-business,” is taking control after winning 412 parliamentary seats of the total 650 in this month’s general election. Though the party has 63% of seats, it won just 34% of the total “popular vote.” Starmer became Labour’s first prime minister in 14 years.

Labour’s ascent comes at a precarious time for the private equity sector more broadly. Following years of low interest rates and hefty private market investing, global dealmaking has been on the decline since early 2022, when rates started to jump. Valuations tumbled, but many firms have resisted marking down their assets.

With the potential for higher taxes on the horizon, CNBC spoke to industry executives in London about the proposed rules changes, and whether they would explore an exit to cities in Europe with more advantageous tax regimes.

One executive, who asked not to be named because he wasn’t permitted by his firm to speak on the matter, said he’s considering relocating to Spain after more than five years working in London. That would mean moving his wife and two children, both under the age of 10.

In addition to business-related taxes, he said that Labour’s plan to institute a value added tax (VAT) on private school fees is causing him to contemplate a move.

Another popular destination is Italy.

Marco Cerrato, a partner at an Italian firm specializing in tax law, says that in the last six months, he’s seen a “radical increase” in the number of inquiries from British residents looking for advice on how to qualify for Italy’s generous tax breaks for expats. The country has a €100,000 ($109,000) annual flat tax on income earned abroad, including carried interest.

Even as Prime Minister Giorgia Meloni pares some incentives for foreign nationals relocating to Italy for work, the flat tax, rolled out in 2017, remains in place.

“The flat tax regime has always remained unaltered even in occasion of the broad tax reform that the current government implemented this year,” Cerrato said.

Cerrato said 4,000 people have moved to Italy since the flat tax was initiated seven years ago. Capstone Investment Advisors, Steve Cohen’s Point72 Asset Management and Eisler Capital are among the hedge funds that have recently opened up shop in Milan, Italy’s financial hub, thanks to the country’s favorable tax regime.

The surge in interest from British firms has also dovetailed with the UK deciding to abolish a tax perk for wealthy, non-domiciled foreign residents that helped them shield overseas earnings.

“London has been the pulpit for financial services, private equity and investors in Europe for a long time,” said Mark Veldon, a private equity partner at financial advisory and global consulting firm AlixPartners. “However, since Brexit, we have seen some movement to other countries.”

Veldon added that “people are more mobile now,” and the decision many people make on whether to move will “depend on how the Labour Government progresses with their pro-business manifesto.” 

Since Labour’s landslide win, the party has shown signs of a potential willingness to make concessions. Some in the investment community are optimistic.

In an interview with the Financial Times, incoming finance chief Rachel Reeves indicated that fund managers risking their own capital might be shielded from the proposed tax change.

“I don’t think it is right that… what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk,” Reeves told the FT. “If you are putting your own capital at risk it is appropriate that you pay capital gains tax.”

AlixPartners’ Veldon said there are encouraging signals that Labour is “willing to back up its pro-business agenda with a commitment to consult fully with business leaders and investors.”

Veldon added, “Overarchingly, Labour’s position on growth and investment has been welcomed by business and investors in general.”

He also said the party hasn’t presented detailed plans underpinning its manifesto, which presents a “big opportunity” for the new government to work with industry to create policies that will attract and increase investment in the UK.

Faeste from FTI Consulting echoed that sentiment.

“The UK needs growth, innovation and investment to get back the mojo and to upgrade the economy and pay for all the needed improvements,” he said. “This will require a dynamic business environment and so far it seems the Labour government is fully tuned into that strategy.”  

Mike O’Sullivan, who previously served as chief investment officer with Credit Suisse’s international wealth management division, agrees that Labour’s discussions with the private equity community shows there’s an openness to feedback and negotiation.  

“It changes the political climate to a much less rancorous, unpredictable one,” he said, adding that the government is aiming “to provide a level of calm and steadiness.”

Beyond taxes, O’Sullivan said he’s encouraged by Labour’s early moves aimed at unblocking planning restrictions on data centers and bringing wind farms to the country. O’Sullivan, who is currently chief economist for Moonfare, a digital investment platform that secures allocations in private equity and venture capital funds, said those are signs that the country is “open for business.”

One of Labour’s flagship pledges is to create a publicly owned energy company.

But the new government needs to move swiftly. The biggest obstacle is the country’s hefty debt level, which “will initially constrain government investment, notably in the green economy,” said O’Sullivan.

AIMA’s Hale said the government knows it needs private investment to quickly grow the economy. He says Labour “must nurture the tax base so that the revenues keep flowing in.”

Veldon says the next few years will be critical for determining the UK’s status in the European business community.

“The UK has largely maintained its crown despite increased competition and market challenges seen since Brexit,” said Veldon. “However, trust in the political system, economic and business environment is fragile, so it will be critical that Labour delivers some quick wins, and their refreshed focus on the UK’s relationship with Europe and the U.S. will also likely help to maintain the UK’s position as a home to the business community.”

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