Of course, this situation was rare because such initial investments, by their very nature, are high risk. They would also pay capital gains tax on any profit made when the shares were sold.The changes mean that in future managers would have to pay income tax at the time that the equity ratchet kicks in – that is, at the point when they receive all increased share of equity, in line with enhanced business performance. It is usually agreed that the value of their shares will later be enhanced if the company achieves targets set by their financial backers – a system known as an “equity ratchet”. The other investors accept this dilution of their own equity stake in order to give the management the greatest possible incentive to make the buy-out company successful.Prior to the Budget, managers faced a tax charge when they bought their MBO shares only if the shares were worth more than they paid for them at that time. These alternative methods are tried and tested, and the Inland Revenue is unlikely to have a problem.So where is the problem? The answer lies in the fact that, without even the briefest mention of it in his Budget statement, the Chancellor has created a trap affecting almost every management buy-out taking place from now on.MBOs operate by means of managers buying a substantial equity stake in the new group of companies formed by the buy-out. Tax planners will simply find other ways of achieving a similar commercial result.
In addition, the Inland Revenue has announced forthcoming changes in the way that convertible shares are taxed.Neither of these changes seems, at first glance, to be particularly far- reaching, and it is difficult to see how the Revenue can justify the sizeable figure that they estimate would otherwise be lost to the Exchequer: more than pounds 100m. In practice these measures will not net much additional tax, as such types of arrangement will no longer be used. One full week after Budget Day, and it is only now that some of the hidden implications behind the detailed press releases issued by the Inland Revenue are becoming widely known. For venture capitalists and managers involved in management buy-outs (MBOs) in particular, the delayed revelations bring bad news. This is linked to a technical change made under the heading “Remuneration in shares subject to forfeiture or conversion”.
The change was intended to clarify the way in which employees are taxed if they receive shares that might subsequently be forfeited, depending on the performance of their employer. “Too many graduates are thinking about the lots of money they will earn, but have no good reason to go for it They should have a relevant interest first There is a bit of peer pressure Some don’t realise the hours involved, or the hard work. I would advise them perhaps to talk to a former alumnus for advice before they apply.”.
People who like to see quick results should go to a trading desk. People with a more long-term outlook might go to corporate finance or fund management. Operations, the back office and research are somewhere in between. Some graduates lump all these things together and don’t differentiate. They need to match their temperament to a suitable job, and make the most of their interests.”Graduates should even seriously consider whether investment banking is what they really want to do, suggests Mr Tiley. It is preferable to have studied a financial discipline, but not essential, if enthusiasm and aptitude are there.
“Graduate training schemes are common, and many involve placements within a large number of departments within a relatively short period of time,” she explains. “These give the graduate a good overview of the organisation before specialising in any one area of work.”Mike Tiley, senior careers adviser at the London School of Economics, says graduates should think carefully about what aspects of investment banking most attract them “It is a broad area,” he says “It depends on temperament. People should think about doing a master’s in a numerate or specialist subject – there is a useful degree in securities finance at Reading University, for example.”It is much less of an old boys’ network than it used to be It is a meritocracy, but it is not easy. They need to be very bright, not just academically qualified, but capable of applying common sense. They need an ability to get on with people from different cultures, bearing in mind that there are more people from a range of cultures employed in the City now.”Carole Divani, senior business manager for Reed Banking Personnel, says that banks look for a first or an upper second class degree from one of the better universities.
“Computer science graduates and maths graduates can go for IT posts, and linguists make good technologists You need a useful, numerate degree. Someone going into mergers and acquisitions needs a decent degree, a numerate master’s or a PhD. “There is no specific recruitment programme for postgraduates, but you are likely to find a lot of PhDs in areas such as derivatives, trading and asset management.”Choosing the right degree may not be essential for a career in investment banking, but it definitely helps, says Peter Newton, managing director of Parallel International, employment brokers that specialise in the sector. “People can enter at the beginning of their career, through graduate recruitment programmes, but some people will join later in their lives after they have done a PhD, or after developing a specialism or working in consulting or asset management,” says Franck Petitgas, a managing director in Morgan Stanley’s investment banking division.
