Private equity firms are considering exiting the UK due to Labour's gains in London.

• Earlier this month, the Labour Party secured a significant victory in the UK and will assume power as a new Parliament begins on Wednesday.
• In his party's campaign manifesto, Keir Starmer, the incoming prime minister, has proposed drastic alterations to the private equity industry.
• Economic uncertainty in the country coincides with a change in leadership.

The UK's Labour Party will commence working to implement radical changes, including contentious plans to increase taxes for the wealthy, now that the British parliament has resumed session.

Earlier this month, Labour won a decisive victory. Now, as party leaders work to fulfill their campaign pledges, some of London's elite are considering leaving the UK for more favorable opportunities in Europe.

In June, the Labour Party released its 135-page campaign manifesto, led by Keir Starmer, the incoming prime minister. The manifesto pledged 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 directly target the country's private equity sector, which, despite Britain's exit from the European Union, remains a major player in regional dealmaking.

"The manifesto states that private equity is the only industry where performance-related pay is considered capital gains. Labour intends to close this loophole."

The tax rate for carried interest, which is the profits paid to private equity and hedge fund managers, would increase from 28% to 45%.

According to Lars Faeste, chairman of FTI Consulting's EMEA team, such changes would result in a "gradual loss of talent over time."

"Many established PE professionals will remain in London, while new top professionals, including expats, will be sensitive to changes in carried interest tax," Faeste stated. "PE professionals are global citizens and have a light anchor, allowing them to easily relocate."

The Labour Party, which identifies as "pro-business," has seized power after winning 412 out of 650 parliamentary seats in the recent general election. Despite having 63% of seats, the party received only 34% of the total "popular vote." Starmer is now Labour's first prime minister in 14 years.

The rise of Labour poses a risk for the private equity sector at a time when global dealmaking is declining due to rising interest rates. Despite valuations falling, many firms have not adjusted their asset valuations.

Industry executives in London were interviewed by CNBC regarding the potential for higher taxes and whether they would consider relocating to cities in Europe with more favorable tax laws.

An unnamed executive, who works for a firm that prohibits speaking about the matter, is considering relocating to Spain after more than five years in London. This would entail moving his wife and two young children.

He is considering relocating due to Labour's proposal to impose a VAT on private school fees, in addition to business taxes.

Another popular destination is Italy.

Marco Cerrato, a partner at an Italian law firm specializing in tax law, has observed a significant increase in inquiries from British residents seeking guidance on qualifying for Italy's tax breaks for expats in the past six months. The country offers an annual flat tax of €100,000 ($109,000) on foreign income, including carried interest.

Despite Prime Minister Giorgia Meloni reducing some incentives for foreign workers to move to Italy, the flat tax introduced in 2017 continues to apply.

Despite the broad tax reform implemented by the current government this year, the flat tax regime has remained unchanged, according to Cerrato.

Since the flat tax was introduced seven years ago, 4,000 people have relocated to Italy. Several hedge funds, including Capstone Investment Advisors, Steve Cohen's Point72 Asset Management, and Eisler Capital, have recently established operations in Milan, Italy's financial center, due to the country's advantageous tax system.

London losing its luster

Milan is attracting top talent due to the country's numerous allures, as stated by FTI's Faeste.

The decline in interest from British firms has coincided with the UK's decision to eliminate a tax exemption for wealthy, non-domiciled foreign residents, which helped them conceal their overseas income.

"Mark Veldon, a private equity partner at AlixPartners, stated that London has long been a prominent hub for financial services, private equity, and investors in Europe. Nevertheless, since Brexit, there has been some shift towards other countries."

Veldon stated that "people are more mobile now," and their decision to move will "depend on the progress of the Labour Government's pro-business manifesto."

After Labour's landslide victory, there have been indications that the party may be open to making concessions. Some in the investment community are hopeful.

In an interview with the Financial Times, Rachel Reeves, the incoming finance chief, suggested that fund managers who put their own money at risk may be exempt from the proposed tax change.

"According to Reeves, it is not fair that a bonus is taxed at a lower rate than employment income, even though it is essentially a bonus, when you are not putting your own capital at risk. He believes that if you are putting your own capital at risk, it is appropriate that you pay capital gains tax."

Veldon of AlixPartners stated that there are positive indications that Labour intends to support its pro-business stance by engaging in comprehensive consultations with business leaders and investors.

Business and investors have generally welcomed Labour's stance on growth and investment, as Veldon stated.

The new government has a chance to collaborate with industry to develop policies that will entice and boost investment in the UK, as the party has not yet unveiled comprehensive plans supporting its manifesto.

Faeste from FTI Consulting echoed that sentiment.

"To revive the economy and fund necessary improvements, the UK requires growth, innovation, and investment, according to the speaker. A dynamic business environment is necessary, and it appears that the Labour government is aligned with this strategy."

Mike O'Sullivan, a former chief investment officer with Credit Suisse's international wealth management division, believes that Labour's discussions with the private equity community demonstrate a willingness to accept feedback and engage in negotiations.

"He stated that the government's goal is to create a more peaceful and predictable political climate by reducing the level of conflict."

O'Sullivan, the chief economist for Moonfare, stated that Labour's early moves to ease planning restrictions on data centers and wind farms are positive indicators that the country is "open for business."

One of Labour's main promises is to establish a publicly-owned energy corporation.

The government's debt level is a significant hindrance to investment, particularly in the green economy, according to O'Sullivan.

Hale, AIMA's representative, stated that the government recognizes the need for private investment to rapidly expand the economy. He emphasized that Labour must prioritize cultivating a robust tax base to ensure continuous revenue inflow.

The next few years will determine the UK's standing in the European business community, according to Veldon.

"Despite increased competition and market challenges since Brexit, the UK has largely maintained its position as a home to the business community, 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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