The Dr Martens flotation is still at the warm-up stage, meaning the owners announce their intention to list the company, then formally confirm their plan, as happened on Monday, all the while using the spotlight to talk up the brand’s “iconic” and “unique” status. Fair enough – that’s how the float game is played.
Soon, though, the outside world will see a prospectus, at which point there’ll be something new to talk about: the spectacular returns about to be enjoyed by the partners of Permira, Dr Martens’ private equity owner since 2014, plus management.
Welcome to the miracle of “carried interest” – the portion of an investment profit that the private equity crew and managers retain as a bonus for success. It’s normally worth 20%, so will spit out some very large numbers in the case of Dr Martens, a business bought for £300m from the founding Griggs family (which wisely kept a minority stake) and now being brought to the stock market with a price-tag of £3bn-plus.
How large will the “carried interest” pool at Dr Martens be? Peter Morris, associate scholar at Saïd business school in Oxford, has crunched the data filed at Companies House since the buyout and has an answer. At a valuation of £3bn, the carry pool would be worth £410m, at £3.5bn, it’ll be £485m; and £4bn would mean £560m.
Now consider that only 300 people work at Permira and that the “carry” spoils tend to be concentrated among senior staff. If 80% of the pool were to be shared equally among 50 individuals, at Permira and among Dr Martens’ management, each person would be looking at between £6.6m (at a £3bn valuation) and £9m (at a £4bn valuation). Those figures are averages, per head, for 50 people.
A few qualifications are needed. First, we don’t know precisely what investment hurdle Permira employs before “carried interest” kicks in (Morris has assumed 8%, typical for the industry). Nor do we know how Permira allocates its bonus pool; sums for individuals could be diluted by duff investments elsewhere by the same fund. And, of course, the numbers assume a complete disposal of Dr Martens, whereas the float is the only the first stage in the sell-down.
But the picture looks broadly correct. Dr Martens – “a canvas for rebellious self-expression across generations,” or so the corporate hype has it – is about to create a large cast of multi-millionaires. The investors in the relevant Permira fund will also do very well, obviously, but “carried interest” is the real kicker for the private equity crew.
Indeed, it gets better still for them. “Carried interest” payments are treated as capital gains, and thus taxed at only 28%, rather than at the top rate of income tax of 45%. That tax oddity has always looked indefensible since the beneficiaries aren’t putting any capital at risk and their winnings are bonuses in all but name.
The Treasury, it was reported last autumn, is mulling reform. Any change would arrive too late for the Dr Martens float, but Rishi Sunak shouldn’t let that deter him. Use the latest example of a “carried interest” bonanza to inject some common sense. Financial engineers do not need personal tax breaks, especially not in the current climate.
Business needs certainty on support before the budget
Elsewhere the lobbying for budget reforms has started in earnest, but well done the CBI for reminding Sunak that the big event is still six weeks away, which is too long for some sectors to wait to learn whether fresh government support is on the way.
The Treasury must employ a few people who have worked in business, so you would have thought the penny would have dropped: companies are making post-March employment and investment decisions now.
In sectors affected by lockdown – such as non-food retail, hospitality, events and leisure – the timing of announcements matters. If Sunak intends to extend the furlough scheme, or grant more VAT and business rates holidays, he shouldn’t wait until March to say so.
One assumes Sunak will have to approve at least some of the items on that list, if only until the end of June, to stay in step with the vaccination programme. But get on with it. The budget is a big set-piece event for the Treasury, but the business world just wants certainty as soon as possible.