Growing concerns: People walk past the Bank of England building in London. The central bank has become worried enough about potential economic threats that it’s started to examine PE giants and their businesses to assess their resilience. — Reuters
LONDON: For an idea of what private equity (PE) ownership can mean for ordinary people, UK supermarkets are a good place to start.
Both Wm Morrison Supermarkets Ltd and Asda have been labouring lately under giant debt burdens put on their shoulders by the financiers who bought them in 2021.
With the cost of servicing all that debt beginning to spiral, it’s not only the owners who have cause to worry.
British lawmakers have hauled in Asda’s backers, including one of the tycoon Issa brothers and PE firm TDR Capital, at various points to grill them on everything from not passing lower petrol prices on to shoppers to the complexities of corporate structure.
Uppermost – for Morrisons, Asda and the host of UK companies now in private hands – are questions about coping with higher interest rates.
The Bank of England has become worried enough about potential economic threats that it’s started probing PE giants and their businesses to assess their resilience.
Corporate Britain’s increased dependency on debt over the past few years creates “big new risks to systemically important employers, not only for jobs but for taxpayers,” said Liam Byrne, a former Labour Treasury minister who chairs Parliament’s business and trade committee.
“There are four to five highly leveraged general retailers like Morrisons and Asda, companies employing hundreds of thousands of people, owned by private equity firms that are taking risks in the dark.
“That’s a dangerous place for UK capitalism to be.”
Morrisons and Asda counter that they’ve spent heavily on their businesses and are cutting “leverage” (indebtedness), the former by selling assets.
Asda has just refinanced billions of pounds of loans, “a reflection of confidence in the underlying strength of the business”, according to chief financial officer Michael Gleeson.
But its interest rate has doubled on some debt.
“Since the shareholder group acquired the business in June 2021, they’ve invested more than £3.5bil,” an Asda spokesperson said. “As a highly cash generative business, it will comfortably be able to meet its financing costs.”
While grocers have become something of a rallying point for British policymakers disturbed by what PE ownership means for UK Plc, they’re far from alone.
US buyout groups especially have flocked to the country in recent years in the hunt for “Brexit bargains”, so called because targets suddenly became much cheaper after the British pound plummeted against the US dollar.
From pubs and gyms to Madame Tussauds, every kind of consumer business was fair game.
The bet was that while these were often low-margin companies, they tended to own lots of buildings, and knockdown prices and near-zero interest rates made them look like surefire winners.
Many were piled up with debt to pay for the splurge, pushing the amount of leveraged loans and high-yield bonds issued by UK companies to a record £200bil-plus.
The PE industry has “eaten up” British companies, said Mark Remington, a portfolio manager at EFG Asset Management, in comments that bring to mind a German politician’s famous description of buyout firms as “locusts” back in the 2000s.
In the five years after the Brexit vote, the number of UK “take private” deals outstripped the whole of the rest of Europe, barring Covid-hit 2020.
That feasting has helped load more debt than ever onto the nation’s businesses. Now the UK is dealing with the hangover.
“There’s nothing wrong with a bit of private equity investment,” Remington said. “But it’s wrong when they lever businesses to the hilt with no path forward.”
The forthcoming general election, which must take place before January, will be another battleground for a buyout industry that’s trying gamely to protect its gains and argue for its utility.
The opposition Labour Party, strong favorite to win power, is promising to jack up taxes on “carry”, the profit share that incentivises buyout financiers to make outsized bets.
But politicians are in a quandary. Crack down too sharply and they could deter desperately needed UK investment at a time when the country’s public markets are moribund.
Go too easy and the government may end up having to cover salary and redundancy costs if a company gets into trouble.
Defenders of the buyout firms argue that borrowed money is often earmarked for spending and acquisitions, as at Morrisons, which has snapped up convenience shops, and Asda, which has expanded to 1,200 sites from 633 stores nearly three years ago.
And corporate bosses do sometimes welcome the smack of harder-edged financial owners.
John Colley, a professor at Warwick Business School, said PE is “quite unlike” publicly listed companies, where “half the non-executives know nothing about the industry”.
Nonetheless, the financial environment for many PE-owned companies is getting tougher. Asda has refinanced some of the borrowing used to fuel its purchase by TDR and the Issas, who first made their fortunes in gas stations. — Bloomberg
