RUTH SUNDERLAND: Auction frenzy is not a sign of confidence in Britain



The private equity cheerleaders have come up with an interesting defense of the indefensible.

We should all be thankful, apparently, that the American buyout pillars that swarm over some of our most important companies are interested in buying UK companies.

It is, we are told, an expression of confidence in the British economy.

Britain buyout: Private equity cheerleaders claim frenzy to buy low-cost UK companies is in fact an expression of confidence in the UK economy

I remember similar feelings emanating from David Cameron and George Osborne in 2014, when American drug giant Pfizer was trying to take over Astrazeneca.

Fortunately, the bosses of Astra, led by Pascal Soriot, still in charge, did not want it.

Soriot avoided the possibility of cashing a multi-million pound payment from the predators, believing Astra could do better on his own.

He was right. And it is in large part because of its sound and principled stance at the time that the UK has had such vaccine success in the face of Covid now.

Another headache is that the proposed takeovers will revive business investment in the UK, which has collapsed since the Brexit referendum. Pull the other.

This forces us to believe that private equieers are real investors, committed to sustainable growth and not at all inclined to strip assets and cut costs.

For some private equity, this is actually true. There have been some extremely successful examples, including the B&M discount and the Kurt Geiger shoe chain.

Likewise, some overseas investments have been brilliant for Britain: look no further than Airbus and Leonardo in aviation or the auto industry.

The problem with placing private equity as a whole in this benign category is that its business model doesn’t fit the mold at all.

Buyout aficionados don’t even claim to be interested in investing over decades – they want to cash in on it much faster.

As a result, the companies they buy out may find themselves in a pass-the-parcel game, where they are taken up on the stock market or passed on to a new private equity owner every few years.

It is a recipe for instability.

If we want to encourage high quality business investment, both domestic and foreign, selling cheaply to dubious owners is not the answer.

There are better ways to encourage foreign investment than to poke fun at private equity barons, like a pet licking a burglar’s hand.

We could focus on improving our tax system, our transportation infrastructure, our supply chains and our education system. These questions are important for serious foreign investors.

The prices offered for Morrisons and others may seem appetizing. Why, however, are the crafty buyout boys happy to shell out far more than the value placed on companies by their own shareholders?

The UK market has been in the doldrums for some time, in part because of Brexit.

US private equity is full of liquidity and the dollar has been strong, so the money is burning a hole in their pocket.

Maybe they are also willing to pay more because they are willing to be ruthless about how they get higher returns.

They may be comfortable with levels of debt – accumulated on the target, not on the private equity firm, remember – that would set public company executives back.

It is also possible that the bidders got carried away and overpaying, which would not bode well for their targets. Whatever the outcome on value, it’s a real concern to the general public when a large corporation falls into the hands of private equity.

Listed companies are transparent. We know who their bosses are and how much they get paid. There is a wealth of readily available and regular financial information.

Private equity is opaque and much less responsible. Power brokers are adept at staying under the radar and believe they can buy UK companies cheaply.

Why, however, are City shareholders and UK plc bosses letting them do it?

Probably because the sums seem too tempting to resist. They prefer a lucrative payout now, rather than a potentially bigger reward down the line.

Confidence matters, but there isn’t much to show. In addition to greed, the eagerness of big investors and DFC bosses to sell suggests a lack of independence and self-confidence.

The boom in private equity deals is not a sign of confidence in Britain, but of the perception that it is a treasure island, with easy choices for pirates.

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