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Labour finds Gordon Gekko

• Robert Peston
• 13 Feb 07, 08:39 AM

The private equity industry should be a little bit anxious this morning, as three candidates to be deputy leader of the Labour Party have expressed concern about how it operates.

The main concern of Alan Johnson, John Cruddas and Peter Hain appears to be job losses at companies like and which have been bought out by private equity funds.

And as I discussed yesterday, Hain is not a fan of the accumulation of vast wealth by those who work in private equity (and others among the new super-rich).

What would or could they do about all this? Well they could make it more expensive for private equity to buy businesses. The way to do that, they appear to think, would be to increase the cost of borrowing for them. And the way to do that would be to end the tax-deductability of interest payments.

They have correctly identified that private equity funds primarily use debt to finance their takeovers of businesses. But would it be technically possible to end the tax-deductability of interest only for private-equity buyouts. And if it weren't possible to ring-fence private equity deals, would it make sense to end tax-deductability of interest for all corporate borrowers? Few companies would cheer I think at the notion of paying more for borrowed money.

But there is a second issue which the Labour trio need to address. They would need to demonstrate that the cost-cutting - which includes job shedding - carried out by private equity isn't good for the British economy, however painful it may be for some employees of private-equity owned businesses.

There was a similar outcry against what were then called Leveraged Buyouts - but were essentially private equity deals - in the US in the 1980s. Remember the film and ? Well Cruddas, Hain and Johnson appear to think Gekko is alive, well and living in London's West End. And they may be right. But for all the furore about LBOs in the 1980s, there is little doubt that they helped to revive a US corporate sector that had become bloated and stodgy.

I am not a cheerleader for private equity. There are legitimate concerns about whether the pension funds upon which many of us depend have been under-invested in the better private equity funds, so have missed out on their super-normal returns, and whether those same pension funds have allowed private equity to buy some British companies too cheaply. But it is simplistic to say "private equity bad, public company good".

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