Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is the former UK ambassador to Lebanon and foreign policy adviser to three prime ministers. His latest novel is ‘The Assassin’

Civilians across the Middle East are braced once again against the increasing possibility of a full-scale conflict between Israel and Hizbollah, the Iran-backed militant group. After the devastation in Gaza, they anxiously watch the reckless high-stakes poker of hardliners who want to keep the region on the brink of war in order to keep themselves in power.  

As every intelligence service is privately acknowledging, turning pagers and radios into lethal explosives was an audacious piece of tradecraft from Mossad, Israel’s spy agency. It hit Hizbollah’s command chain, communications and confidence. It is one of those moments in the Middle East that resonates beyond the immediate: it will be spoken about in hushed tones for years, perhaps decades. Social media makes the psychological impact even greater. Hizbollah is in shock, and seething. Its rank and file feel insecure.

The key question on the Hizbollah side is whether it absorbs this humiliating blow or hits back. It is probably a case of when, not if, it chooses to do so, alongside its threats of revenge for the assassinations of its leadership.

The key question on the Israeli side is whether this was a prelude to a serious land offensive, or just a psychological operation to degrade Hizbollah? I hear both explanations from the Israeli military, many of whom think it is only a question of when, not if, they launch a land invasion aimed at removing Hizbollah from the south of Lebanon and establishing some mirage of a “buffer zone”.

Faced with this moment of peril, the international community must focus on two urgent challenges.  

First, civilian protection. The reality is that hundreds of thousands of civilians — in Lebanon and Israel — are on the brink of a devastating escalation of this conflict if the hardliners get their way. Many are already displaced, injured and killed. They must be our central concern.  

Second, upholding international law, including legal constraints on the conduct of war. As we have seen with cyber and lethal autonomous weapons, the speed of technological change means that the systems designed to contain the ingenuity of humans to find new ways to kill each other struggle to keep up. But the basic rules are not complicated, whether the weapon is a pager or a rocket: don’t kill civilians.  

Now, sadly, it appears that neither of those challenges is a major priority for the current leaders in Iran and Israel. Prime Minister Benjamin Netanyahu’s increasingly hardline government is focused on tactical wins. The Iranian regime is content to let others fight its battles. So we must also focus on preventing disastrous escalation. 

There is space for diplomacy. It can build the off-ramps for both sides, for when leaders emerge with the wisdom to take them. UK foreign secretary David Lammy and others are working the phones to regional leaders. Wise voices and cool heads can prevail. The challenge is that both Israel and Lebanon are in political crisis — in Beirut, there is a caretaker government and no president, while in Israel, Netanyahu’s far-right coalition is fracturing.

International mediation on Israel and Lebanon needs to deal not only with the short-term cessation of hostilities, but land-border demarcation, a permanent peace (not just a ceasefire) and the return of state authority to south Lebanon. The Lebanese army has to be supported to provide security on the border, as we have helped it to do on the border with Syria.

From my discussions with the Lebanese prime minister, Najib Mikati, and others, it has become clear that ultimately the key to regional de-escalation lies in Gaza ceasefire talks and hostage releases. There are still fundamental differences to overcome — how to manage the Rafah crossing, prisoner releases and the future of the so-called Philadelphi corridor, a narrow strip of land along Gaza’s border with Egypt. But with the right collective pressure and political will these obstacles are surmountable.  

Ultimately, the prize remains a big, bold agreement between Israel and the Arab world that includes the normalisation of relations; the creation of the long-promised Palestinian state; and the isolation of the Iranian regime. There is no way out of a wider crisis without hope that both Palestinians and Israelis have the right to security, justice and opportunity in lands they can call their own. This will require genuine partners for peace on both sides of the table.  

So Britain and its allies should take the parameters for a two-state solution to the UN Security Council. Sometimes the immediacy of the danger can create space and urgency for negotiations. 

Hamas, Hizbollah and Israeli hardliners want to bury a two-state solution, displace the other side and destroy the prospect of coexistence. The stakes are too high to let them do so.

Proponents of the latest changes are betting that easing the hurdles for companies, even in ways investors dislike, will pay off

Team GB should be proud of its haul of 65 medals at the 2024 Paris Olympics – more than any country besides China and the US.

However, with 14 of those 65 medals being gold, GB may well feel like it took the runner-up prizes a few more times than it would have liked.

Unfortunately, there are parallels here with the British capital markets, currently lamenting a dearth of new and exciting IPOs – a field in which we’re also trailing the US.

It is widely agreed radical changes are needed. That’s just what is happening. Yet still not everyone is excited.

New proposals in July to amend rules governing disclosures and investor access to capital raisings were announced as part of the government’s ongoing plans to rehydrate the country’s capital markets.

The key proposal, if enacted, would eliminate the need for companies to issue a new prospectus in most circumstances other than for initial listings on public markets. The proposals also outline measures to increase retail participation in both public and private market investments.

These proposals are intended to complement the recently introduced UK Listing Rules, which came into effect last month. The rules aim to remove the barriers on the road to UK investment recovery by relaxing restrictions on dual class share structures, which allow managers and founders to exercise control over companies in which they may only hold a minority stake.

They also remove requirements to seek shareholder approval for a number of significant corporate transactions, or those with related parties.

Pedalling ahead

Although measures to encourage a broader base of investment are a largely welcome boost to UK companies in need of an edge, several of these moves are perceived to come at the expense of investor protections valued by UK shareholders.

On balance, this proposed regulation looks like a bold gamble, which hinges on the idea the UK can build a more competitive capital market by streamlining the requirements for listed companies, even if that means introducing features their investors largely dislike.

Pushing forward market features that many of the largest investors oppose will require a careful eye on the detail if we are to attain the leading capital market everyone seeks.

Whether reducing investor protections and required disclosures is the right route to go down will depend on the UK’s ability to attract high-performing and well-governed companies. Any perception that the new rules represent a race to the bottom – in which investors place their capital in lower quality businesses, subject to weaker transparency and greater management control – will need to be fought against.

Overall, while not everyone is happy with the changes, investors and companies appear to have accepted the current regulatory direction of travel is not about to alter, having just been confirmed as one of the first acts of the new Labour government.

So, the strategy has been set and the big call has been made. Let’s hope that when the figurative tyres are changed, it turns out to be a stroke of genius which puts UK companies on a winning streak rather than setting up investors for a fall.

Lindsey Stewart is director of stewardship research and policy for Morningstar Sustainalytics

Stay informed with free updates

Simply sign up to the Life & Arts myFT Digest — delivered directly to your inbox.

There are people out there who may be unfamiliar with Charlie Mullins, the founder of Pimlico Plumbers. If so, you may have little time to acquaint yourself. Mullins is apparently poised to leave the country for tax reasons. Unlike others who have rushed to attack Chas, I mostly admire him. Having left school at 15, he built the company from nothing into a large and successful business, and indeed one that I have used with great satisfaction, although it is on the pricey side.

From what I hear, I might not enjoy working for Chazza but, otherwise, the only question mark in my mind about him concerns his face, which has transformed with his bank balance from a fairly normal visage into a look that I can best describe as Rod Stewart mid-electrocution. I have no knowledge of the constituent parts of his mug, which certainly looks as if it has had a few visits from Pimlico Plastics. But if you told me his face was home to the UK’s strategic Botox supplies, I would not rush to differ.

Anyway, Mullins has declared that he intends to take the UK’s Botox lake to Marbella or Dubai, for fear of the new Labour government’s tax plans. I know the conventional position would now be to deploy the rest of this column giving him a damn good thrashing for wanting to protect his stash from an increase in inheritance tax. Some version of good riddance, you tax-dodging dunny diver.

But actually, I don’t really care. If he believes the saving is substantial enough to mitigate the pleasure of living in the land of his birth, that seems to me to be his decision. In fact, he spends quite a lot of time out of the country already, so he may not have found the choice as hard as I would. It’s his life and his money. News reports are often full of millionaires demanding higher taxes. How refreshing to find someone who made it the hard way taking a contrary view. No marks for altruism, but a high score for honesty.

He is also entirely free to make a song and dance about it. He may even be performing a public service, reminding the chancellor that taxes on the truly wealthy rarely raise as much as people would wish because the well-heeled have choices not available to most of us.

Nor, unlike others, do I think people trying to protect their legacy are doing anything other than fulfilling that primal and noble urge to leave as much of the money you have earned and paid tax on to your spawn.

What I do care about, however, is checking that he does actually leave. A hardy perennial of new left-leaning governments is the upsurge of famous rich people declaring that they are off if said party wins the election. Just before the election of Tony Blair, the composer Andrew Lloyd Webber was widely reported as saying he would depart if the country turned Labour. He has since denied such stories were true, and it must be said that he is still here and indeed took a peerage that same year.

Ahead of next month’s budget, the business pages are full of reports that unnamed non-doms and plutocrats have fuelled up the first plane to Belize or the Caymans, or even Italy, to avoid Rachel Reeves’s tax wheezes. Some of the threats may be contrived, though I’m inclined to believe the non-doms who are raging over plans to subject their full estates to inheritance tax. 

What we rarely read, however, are exhaustive reports of whether they follow through with the threat. Threats to leave make for great headlines. What you rarely see is the confirmation they have indeed left the building or that they decided to stay after all. It is time for an audit of the runners. Did they really depart? Have they slunk back? Did they stay or did they go now?

And this is the point, Charlie. You can spread your whiny wings and fly away, but remember, no sneaking back to get your balayage done. You made your sunbed. We don’t want to see you on Sunday with Laura Kuenssberg, opining from some lounger on the state of UK social policy. You have to pay to play.  

Even so, at least you put your mouth where your money is. In Marbella. The old boilers of Britain salute you. Your plumbing days may be behind you, but here’s hoping you continue to feel flush.

Email Robert at magazineletters@ft.com

Follow @FTMag to find out about our latest stories first and subscribe to our podcast Life and Art wherever you listen

The Treasury collected £3.5bn in inheritance tax receipts between April to August, latest figures from HMRC published this morning (20 September).

This is £300m higher than the same period last year.

Another record-breaking year for IHT receipts is being predicted and experts believe this upward trajectory will continue year on year and hit £9.7bn in 2028/29.

However, there are rumours that IHT will be increased next month when the new Labour government unveils its first Budget.

The current £325,000 nil rate band has been at that level since 2009.

The residential nil rate band was introduced on a phased basis between 2017 and 2020 and potentially gives an additional £175,000 nil rate band (making a total of £500,000) subject to certain rules.

Nucleus technical services director Andrew Tully, said: “The ever-increasing IHT tax take may give the government food for thought as we approach next month’s Budget.

“Changes could be made such as scrapping or updating the rules on agricultural land and business relief.

“Currently, a person can claim up to 100% relief on the inheritance of agricultural land if it is being actively farmed.

“This could be reduced, or certain limitations placed on the maximum value of the relief.

“There could be a tightening of qualifying criteria for business relief, perhaps relating to unlisted shares and AIM portfolios.

“Although that could be difficult to implement and may not tie in with the desire to increase investment in the UK.”

Shaun Moore, tax and financial planning expert at Quilter, is calling for the IHT system to be simplified to make it easier for people to gift during their lifetime.

He said: “The complexity of the current system often leads to confusion and inequities.

“A simpler system could help reduce the administrative burden for both taxpayers and HMRC, while also making it fairer.

“Similarly, increasing the gifting threshold would encourage earlier wealth transfer, reducing future IHT liabilities, and could boost consumer spending.”

The number of families being caught out by tax bills after death on gifts made in lifetime has been surging, according to figures from HMRC obtained recently by wealth management firm Evelyn Partners show.

Tax Partner at professional services and wealth management firm Evelyn, Laura Hayward, said: “The number of estates that paid IHT on gifts made less than seven years before death more than doubled from 590 in 2011/12 to 1,300 in 2020/21, according to the data.

“Meanwhile, the total sum of IHT paid on gifts also more than doubled from £101m in 2011/12 to £256m in 2020/21 – an increase of 153% in monetary terms and 119% in real terms.

“The data suggests the average tax charge payable by beneficiaries on lifetime gifts was £171,186 in 2011/12 and £196,923 in 2020/21.

“That suggests some very significant tax bills are being delivered to unprepared beneficiaries after their generous relative has died, and this might be another reason for those contemplating making big lifetime gifts to start the seven-year clock ticking sooner rather than later.

“Even if the gifter were to pass away within seven years, there is a chance the IHT bill could be reduced by taper relief.”

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Earlier this summer, the private equity firm 3i paid itself over €1bn with money one of its companies had borrowed, helping bring the volume of these so-called “dividend recapitalisation” to a new record.

On one hand, this demonstrates how much value private equity firms can create for their investors. 3i paid just €130mn for a controlling stake in the Dutch retailer Action back in 2011, and since then it has extracted about €4.5bn from the company through eight dividend recaps.

The company has been able to keep borrowing to chuck money back to its owners thanks to a huge increase in its earnings over the past decade (Bryce wrote a great post on how big a deal Action is for 3i here). Here at FT Alphaville we’ve been somewhat sceptical of the private equity investment case, but this is a clear winner.

On the other hand, companies borrowing more and more money purely to pass it on to private equity owners isn’t really a good look, and can cause problems further down the line.

This is particularly pertinent given that MainFT is reporting that private equity firms are pushing for changes to loan docs that would allow them to pay themselves even bigger dividends. (remember when private equity barons insisted back in 2023 that they would “go back to investing in the old-fashioned way” and rely more on operational nous than leverage? Good times).

All this is why FT Alphaville was so intrigued to spot this paper by Abhishek Bhardwaj, Abhinav Gupta and Sabrina Howell in our weekly round-up of research published by NBER, which put some number on the general vibes around dividend recaps.

It argues that the strategy:

. . . lead to misaligned incentives and moral hazard problems for GPs, causing them to pursue activities that diverge from the interests of fund investors, company employees, and pre-existing creditors.

Here’s how the study worked: Across the sample of about 47,000 US leveraged buyouts by 1,200 private equity firms between 1995 and 2020, the researchers found almost 1,600 dividend recaps. They then paired this with data on loans, fund returns, payrolls and bankruptcies.

Bhardwaj, Gupta and Howell found that dividend recaps mostly happen at larger, healthier companies. This makes sense, as it’s a lot easier to get creditors to feel comfortable with this kind of financial milking when they can see solid cash flows coming in.

Once you adjust for that, dividend recaps massively increase the danger of bankruptcies:

. . . The causal analysis paints a picture in which new debt induced by cheap credit increases firm risk, consistent with theories predicting agency problems of debt. We focus first on the firm. We show that dividend recaps increase the chance of bankruptcy, for example by 31pp in the following six years. This is large relative to the sample mean of 1.3%.

On the other hand, if a company survives, dividend recaps also appear to increase the chances “exceptionally good outcomes” — ie strong revenue growth and IPOs. That might be because dividend recaps make companies more of a binary bet, and encourage it to go for broke. From the paper:

Having realized good returns from the targeted portfolio company, the GP may encourage its managers to take more risk because the investment’s payoff has become more call option-like.

However, turning to returns, the researchers found that dividend recaps were positive for the returns of individual deals, but seemed to be negative on a fund’s overall returns. Here’s their explanation for this weird phenomenon:

At the fund level, we show that dividend recaps decrease the fund’s cash-on-cash multiple and public market equivalent (PME) return measures. There is no effect on IRR, consistent with bringing cash flows forward in the fund’s life. What might explain a positive effect on deal returns yet a negative effect on fund returns? We show that dividend recaps dramatically increase short-term distributions paid out to the fund, which could incentivize the GP to raise a new fund on the basis of good interim returns, consistent with Gompers (1996) and Barber and Yasuda (2017). Indeed, dividend recaps sharply increase the chance of launching a new fund.

These results suggest that dividend recaps are used to benefit GPs by enabling early distributions and new fundraising. In turn, they may focus their effort more on the new funds. Consistent with this, we observe that dividend recaps cause lower returns for subsequent LBOs within the fund and reduce number of new LBOs pursued, relative to funds of the same vintage.

So what about the impact of people that work at companies that have done a dividend recap?

You’ll probably be entirely unsurprised to learn that they are “largely negative”, even for companies that survive and thrive despite leveraging up to make payments to the private equity owners.

We find a large negative effect on wage growth of-53%, relative to a mean of-4%. This is driven by declining payroll, especially at the left tail (i.e., the worst performers among survivors). There is a negative albeit insignificant effect on employment growth, driven by greater chances of being in the tails of the distribution, with a significantly lower chance of modest positive employment growth.

Overall, the results suggest that by making firms riskier, dividend recaps raise the specter of bad outcomes for workers — exit, bankruptcy, and significant wage declines — but also increase the chance that the firm experiences a good outcome for owners (IPO, large revenue increases).

Still, at a time when private equity firms are under immense pressure to return money to investors — they’ve now raised more money than they’ve handed back for six straight years — and rates are now falling, FTAV suspects that dividend recaps are going to boom even harder in the coming years.

As the paper concludes:

. . . Our analysis implies that rising CLO demand will increase opportunistic dividend recaps, with negative implications for portfolio company and stakeholders including employees, pre-existing creditors, and fund investors.