While swathes of the economy splutter back to life, desperately attempting to survive after 18 months on life support, not everyone is struggling equally. The City of London is fire-hosing private equity firms with money, spurring them to borrow and buy up corporate Britain at a furious rate. The latest big target is Morrisons, which just agreed a $9.5bn (£6.9bn) takeover offer by the US private equity firm Clayton, Dubilier & Rice (CD&R). It’s not the first supermarket chain to have caught the attention of private equity tycoons: Asda took a big private equity investment last year from TDR Capital, alongside the Issa brothers.
But private equity’s appetite goes far beyond supermarkets. In the first half of 2021 there were 785 private equity deals in the UK with a combined value of almost £74bn, according to KPMG. Telecoms, business services, IT, veterinary services and even children’s social care have all caught the eye of investors hungry for cut-price acquisitions. “Private equity is rampant,” said Martin Sorrell, the influential advertising boss. “They are the dominant force now.”
After a period of drought, a flood of investment might not seem like such a bad thing. But the financial tools employed by private equity firms may harm overall prosperity, and the losses are unlikely to be shared equally – demographically or geographically. The Conservative government’s plans to “level up” left-behind communities will not succeed if the businesses that power those communities are stripped of assets, their profits funnelled to City managers or hidden in tax havens.
The world of finance, too, often seems impenetrable, but the economics aren’t difficult to grasp. In essence, a private equity firm takes money from other investors – from a pension fund, say, or a billionaire – then invests it for them, promising high returns. They buy a company, such as a supermarket chain, then apply a financial box of tricks to it, usually involving lots of borrowing, to squeeze more from the business. They share any winnings with those investors.
To their critics, private equity firms are blood-suckers that load healthy companies with debt then asset-strip them, leaving lifeless husks. The private equity titans counter with the opposite tale: they buy underperforming firms, install whizzy IT systems and inject far-sighted management, borrow money to juice up performance, and turn them into roaring engines of capitalism, making everyone rich. As ever, the reality is a mix of the two.
The core of private equity’s problem – for society, but not for its investors – is that many of the tricks in private equity’s toolbox just redistribute the pie upwards, generating immense profits but deepening inequality and sapping growth.
Take “dividend recapitalisation” – a complex term for a simple trick. Here, a private equity firm buys a company – let’s call it CareCo – then orders it to borrow a lot, and pays some or all of the borrowed cash to the investors, instead of investing in staff or the business. The moguls buy new yachts with the cash, while CareCo, directly on the hook for the debt, must work harder to service it.
Or perhaps they take a different tack, and split CareCo in two: an operating company, which we will call OpCo, that employs staff and provides care, and PropCo, which owns all the property. The private equity owners force OpCo to sign long-term contracts to pay high, fast-rising rents to PropCo, meaning OpCo must cut corners or staff to pay rent on property it previously owned. Meanwhile PropCo, made more valuable by those juicy long-term rental payments from OpCo, can be sold at a high price, with the private equity players trousering the proceeds. If that sounds theoretical, it isn’t: this tactic played an important role in the collapse of the care company Southern Cross.
The box of tricks contains other wringers: running CareCo’s financial affairs through tax havens to escape tax, busting the unions, squeezing its suppliers or truck drivers harder, or buying up competitors to build local monopolies. None of this is productive. The titans get rich as the wider economy is damaged. It is the “profit paradox” in action.
Now think how all this plays out, geographically. The winners – the bosses, bankers and advisers – are probably based in the US, offshore or in wealthy parts of the UK. The losers are the British truck drivers, checkout workers, small-business suppliers, care home staff or gig economy workers, who are disproportionately from poorer areas, disproportionately women, and disproportionately people of colour. Overall, money flows through hidden financial pipes from poor regions to rich, from black and brown people to white, and from women to men. That’s precisely what happened in the last global financial crisis, with the “metropolitanisation of gains, and the nationalisation of losses”.
So who will step up to stop this? The market alone cannot. Private equity has an unfair advantage in the great British sell-off: because it is prepared to squeeze out more profits than less aggressive players, bankers will lend it more, meaning other potential owners cannot match its exorbitant bids. It is a giant, finance-driven market distortion.
In theory, the Competition and Markets Authority can block deals that distort markets, but in practice it has lacked the resources, political backing and even the mandate to take on private equity and the City on behalf of ordinary people.
A social movement is needed, one that understands the financial tricks of the City, and is ready to take them on. Such a movement must cross political divides – the Daily Mail is angry about this stuff too – because what’s at stake matters more than partisan divides. At risk, amid the great British sell-off, are the businesses we value, the jobs we rely on and the communities we live in. To level Britain up, we must level private equity down.
Nicholas Shaxson is author of The Finance Curse, and a co-founder of the Balanced Economy Project, a new anti-monopoly organisation