Private equity is seen by some as predators of the pandemic, buying UK firms cheaply. Is it time for reform?
By Content Director Saxon East
It’s not just the insurance industry that is seeing the continued rise of private equity.
Supermarket chain Morrisons is currently involved in a private equity bidding war, with an eventual sale likely to top £6bn.
The buyout of such a well known UK brand has brought private equity sharply into the spotlight of the media and regulators.
Private equity has snapped up 124 British firms this year, worth £41.5bn, according to data company Dealogic.
The majority of private equity money is foreign.
Thirty years ago, foreign ownership of UK companies was 13%, according to the Office for National Statistics (ONS).
However, a report by share ownership and market intelligence firm Orient Capital last month put foreign ownership of UK companies at 66%, with overseas private equity a major player in buying this country’s firms.
Why does this matter?
One argument is that private equity has an unfair advantage in acquisitions over listed companies thanks to its use of leverage, tax benefits and lower disclosure requirements.
They have now become ‘pandemic predators’, using these advantages to snap up companies on the cheap - this is a bad outcome for shareholders.
Following Fortress Investment Group’s £6.7bn bid for Morrisons, Rupert Krefting, head of corporate finance at M&G, which owns 1% of the supermarket, said: ”We do not believe that the takeover proposal reflects the true value of the company.”
A separate argument is that foreign ownership focuses on home markets when conditions worsen - making heavier cutbacks in staff, research and development and capital expenditure on overseas businesses.
Ideas to reform private equity
This raises a question over whether private equity could face greater regulation, in turn putting a cooler on its investments in UK insurance.
One idea is to reform the tax system. This would end ‘carried interest’, meaning private equity payouts would be taxed at income rather than the lower capital gains.
Another idea is to stiffen the laws on foreign takeovers.
Currently, the government is introducing new laws on protecting vital UK interests in light of the Covid-19 pandemic, such as defence, medical and energy.
But the Labour party is calling on the government to go a step further by ensuring jobs, research and development and other capital expenditures are protected when there is a foreign takeover.
”Responsible business owners invest in their companies for the long term because they know it is the best way to create wealth, support jobs and achieve long-term success and profitability,” said Seema Malhotra MP, Labour’s shadow minister for business and consumers.
Tory deregulation desire
Despite all these pressures, the good news for private equity and its supporters is that the government is unlikely, certainly in the short term, to make any major changes.
This is because the government is keen to attract foreign investment following Brexit and private equity is essential to this.
The Tories believe foreign investment is positive - it supports jobs, growth and economic stability.
The pound would face a severe devaluation, massively hampering our ability to pay for imports, if foreign investment dried up.
Another dimension to this is that the Johnson government is unlikely to cut taxes following the pandemic hit.
Prime minister Boris Johnson wants money to ‘level up’ the UK’s regional disparity, which is one of the worst in Europe alongside Italy.
To appease the Conservative right wing, deregulation is the obvious choice.
Chancellor of the Exchequer and former banker Rishi Sunak is keen to ease some of the restrictions on banking and finance that came in following the financial crisis.
Meanwhile, a right wing Tory pressure group led by Iain Duncan Smith wants a far-reaching deregulation agenda enacted.
This includes easing the rules on capital requirements for insurers under Solvency II and scrapping large parts of Europe’s GDPR.
So, the insurance industry - and especially UK broking, which has seen immense private equity investment over the last 20 years - can sleep easy for now.
They will have to ignore the background noise though, because one thing is for sure - this is a debate that will continue to rumble on.
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