UK supermarket chain Wm Morrison will be the UK’s PE buyout since 2007
Figures from Refinitiv, the financial intelligence company, show that private equity (PE) groups have bought or announced bids for 366 UK companies so far this year, the most for a comparable period since records began in the 1980s.
The latest came over the weekend when an investor group led by US investment manager Fortress agreed a £9.5bn deal for supermarket group Wm Morrison. It will be the UK’s largest leveraged buyout since KKR bought Boots in 2007.
The FT this morning reported that KKR is to set up a team of dealmakers to focus on buying UK companies. Other PE firms are taking similar steps. Blackstone has hired a managing director at TowerBrook Capital Partners as a partner to focus on UK private equity deals. Carlyle last year appointed GlaxoSmithKline’s former chief financial officer to oversee UK buyouts.
“Shares in KKR and other listed private equity groups are trading at all-time highs, as investors funnel ever-larger sums into the industry, boosting fee income,” the FT said.
The development is fuelling anxiety about the growing role of PE in the UK economy. London’s Daily Mail, Britain’s best-selling newspaper, has launched a campaign against what it calls predatory deal making. The criticisms include charges PE firms lack transparency, depend upon tax havens, prioritise financial returns over real economic activities and are capitalising on the consequences of the Covid crisis, which has depressed commercial property and retail company valuations and slashed the cost of debt.
The industry’s defenders say PE is doing nothing conventional investors aren’t.
Given that UK Chancellor of the Exchequer Rishi Sunak made a fortune in private equity, it’s likely the second viewpoint is shared by key figures in the UK government.
But there is nothing natural or normal about the growth of PE.
Companies that make things face a host of risks that have been accentuated by Covid. Workers have got sick or been furloughed and demand has slumped.
But investors in intangible capital – shares in firms, particularly those in high-tech that produce intangibles – have never had it so good. The Dow Jones industrial average index is up more than 80 per cent since the Covid crisis broke last March.
PE firms capitalising on tax havens have seen most of that capital gain translate into reported income. Investors seeking to maximise returns to investors have never had a bigger incentive to invest in PE.
The most obvious consequence is an unprecedented increase in the wealth of holders of intangible capital. According to Boston Consulting Group, global financial wealth reached a record high of $250trn in 2020.
This is fuelling demands in the UK for a wealth tax. Britain’s government is said to be considering a windfall tax to help pay for the cost of its Covid relief programmes. But it’s unlikely to go anywhere near reversing the exceptional increase in inequality recorded in the past 18 months.
An alternative approach is to understand what is actually fuelling soaring intangible capital: laws and accounting codes that guarantee a superior return to those that invest in it. It has nothing to do with the productivity and profitability of the firms PE is acquiring in the UK.
This can only be reversed is by addressing these laws and codes at the national level. A simple yet effective measure would be to require any firm doing business in the UK, including PE firms to incorporate a local company with a balance sheet proportionate to sales in the country and at least half their assets in tangible assets or government bonds.
They would still enjoy a return but one in line with companies with direct investments in the UK.
It might not kill off PE. But it would definitely make the contest for savings which PE is winning by a wide margin much fairer.