First, private equity holds us to ransom. Now it wants us to bail out its losses
It could be your local Pizza Express, the home caring for a cherished relative, your favourite supermarket, even the sports tournaments you love. They are all ventures owned not by their founders or a company quoted on a public stock exchange. They are in the hands of a new class of invisible investors who mortgage companies for self-enrichment, rather as homebuyers mortgage themselves to buy homes.
But while homebuyers hope for a general rise in house prices to increase the value of their initial equity, the invisibles do everything in their power to make the mortgaged company look super-profitable – and then sell it on for a handsome return.
This “mortgage the company and flip it” industry is called private equity and it has become the fastest growing, richest and most influential business in the UK, in turn the centre of European private equity. But last week, we learned, courtesy of the Financial Times, that the foundational privacy it so prizes and that has allowed, via tax havens, excessive remuneration and freedom from employee and shareholder accountability, some of its leaders to become the wealthiest on the planet, has risks it does not like.
Its excessive debts, once the route to fortunes and, it would say, “business discipline”, are crushing it. On top, the commercial property market no longer looks a one-way bet. It wants its vast mortgage debt guaranteed by the government, even though the interest charges drive the underlying companies into operating losses. Otherwise they will lay off hundreds of thousands of people to save their own skins.
Fearing an unemployment crisis this autumn, it seems the government will buckle. It is looking at ways around EU rules that forbid such intervention. Indeed, the Brexit negotiations are partly stalled over the issue. Britain wants the freedom, post-Brexit, to bankroll private equity billionaires. The EU is insisting that if Britain wants a trade deal, it had better continue respecting its rules on state aid. The talks are deadlocked.
For private equity has emerged as not just a British but a pan-European phenomenon, of which increasingly hard questions are being asked, especially in the wake of the coronavirus. So the death of Zoilo Patiño, an 84year-old with Alzheimer’s, of Covid-19 in a Madrid care home owned by the government became a national talking point in Spain in March. His body was found 24 hours after his death in a locked room, even as the elderly were being “abandoned, if not dead, on their beds”, as one Spanish minister said.
The subsequent investigation into the management company – DomusVi, which had been contracted to operate the home – showed it had been stripped down to a “fast-food version” of healthcare by years of cuts: there was only one care worker for every 10 residents, with not even the PPE to help cope with a dead body. But DomusVi, Spain’s largest care home company, is owned by the British private equity company ICG, which refinanced €1bn (£900m) of debt when it bought it from a French private equity firm in 2017. Of course, EU negotiators are interested in how Britain treats private equity and its debts: it is a pan-European business – and can be a matter of life and death.
For the care home sector is beloved across Europe by private equity magnates. It has two attributes that attract them. First, it is a business with lots of mortgageable property, so the private equity firms can borrow billions to buy the underlying companies, securing the loans on the companies’ own assets. Second, care homes have regular, predictable cash revenues that allow them to service the resulting debt offsetting it against tax. So the investors in the private equity company can put up just tens of millionsof their own money at risk (equity) and then borrow hundreds of millions, even billions, to buy companies that will service their debt. Strip out all extraneous costs (and often more), sell the care home company on and, hey presto, you’re a multimillionaire.
Private Equity Newshas reported that in Britain private equity companies have pumped £1.8bn into the care home sector over the past 10 years and operate 13% of residential and nursing homes, with 56,700 beds. One of the leaders is Care UK, backed by the private equity company Bridgepoint. In the past 10 years, while its number of beds has more than doubled, its staff numbers have fallen by a third. All around Europe the care home sector has suffered disproportionate Covid-19 deaths.
Private equity’s interest does not stop at care homes, though. Retailing is asset and revenue rich, so it’s not surprising that two private equity companies are vying to buy the supermarket chain Asda from Walmart. Southern Water is part owned by private equity. The Blackstone Group is the largest private equity property manager in the world, savaged by the UN for its rapacious attitude to rents, fees and repairs; it owns the UK’s Sage Housing. And how about fostering? The National Fostering Agency and Compass Fostering are both private equity owned.
These sectors have another quality. Retailing, catering, hospitality, care homes, utilities and fostering also tend to employ more people for any given pound of turnover than other sectors. Indeed, private equity employs up to 840,000 people, on the industry’s own estimates. Its threats are not empty. It needs the government to underwrite its vast debts or it will be ruthless in cutting jobs.
The government has to be no less ruthless in response. It cannot be seen to be nationalising losses and privatising gains. If private equity companies want government guarantees then there should be tough quid pro quos – one leading CEO of a FTSE company confided in me that they were amazed the government was so feeble. The accountability it has resisted must be put in place. Balance sheets should be restructured so that banks and directors of private equity companies share the pain. The state should get shares in return for its guarantees. There should be reciprocal commitments on executive pay, working practices, sustaining employment, union recognition and delivering a social purpose beyond short-term profit. If private equity wants public largesse, then it is time to recognise that there are citizenship obligations in return.
In the long run, the tax breaks that fuel the entire industry – offsetting interest payments against tax – need to be phased out. It is a sector that has done more to degrade contemporary capitalism than any other. We need more public companies publicly accountable to shareholders and the public, and less indulgence of the indefensible. Britain should not be putting a Brexit deal at risk to save them.