13 Sep 2021
Looting is experiencing an unprecedented rise. The global value of transactions by private equity firms is expected to reach $ 1 trillion (£ 723 billion) for the first time this year.
And private equity firms have around £ 2.5 trillion waiting to be deployed in buyouts.
The buyout barbarians are targeting Britain, where state-owned companies, those listed on the stock exchange, are trading at low valuations.
Private equity firms made more deals in Britain in the first half of the year than in the same period in any other year.
The number of buybacks is up 60% in 2021 compared to the same period in 2019.
Private equity firms have announced approaches to 13 UK listed companies since early 2021.
The European head of private equity at Blackstone explains that Britain’s “favorable business environment” explains why “there are plenty of opportunities”.
Private equity works that way. You and I decide to start a business.
We collect funds from our clients and put them in a fund in a tax haven.
We find a few companies that we want to buy, using a little of our own money (equity) but financing as much as possible with debt, or “leverage”.
We then sell or insert the companies on the stock exchange at a profit after cutting costs or selling assets. We return the money to our investors.
Before doing this, however, we take our share – known as “deferred interest” – 20% of profits above a certain amount.
Because we have invested some of our own money in the fund, we can view this as a capital gain rather than income. This means that it is taxed at 28 percent, not 45 percent.
Between 2006 and 2015, private equity bosses pocketed at least £ 165 billion in deferred interest.
There were three billion in private equity in 2005. There were 22 last year.
Charges associated with the redemption of private equity, such as transaction closing costs and annual management fees, are charged to the accounts of the acquiree, not the private equity fund.
Typically, a £ 10bn transaction generates an upfront fee of £ 50m (0.5% fee) for completing the sale and £ 30m per year in management fees.
This is on top of the huge fees that the accountants and lawyers overseeing the case are taking out of the process.
The shareholders of the Morrisons supermarket chain are voting on a private equity offer next month.
Morrisons freehold land and buildings are worth around £ 5.8bn.
It is more than the market value of the business as a whole.
So even without selling stores, new owners could increase their returns by borrowing against their value.
A 2019 study found that when companies buy listed companies, 13% of jobs are cut over two years and the wages of those who remain go down.
If a buyout goes well, private equity bosses receive huge returns.
If the business goes bankrupt, the private equity firm sells the assets to pay off the debts.
Private equity does the dirty work of capitalism in the dark. But it’s not much better in the light.
A public company, publicly traded, owes a little bit of debt to shareholders, but not to the rest of us.
So Debenhams was plundered by private equity in the early 2000s, but when it laid off all of its staff and closed all of its stores, it was a stock exchange company.
For the bosses, taking money off the backs of the workers is the most important thing.
Private equity is not the “unacceptable face of capitalism”, it rather shows the reality of how this system works.