July 31, 2021

Bonanzas in private equity world spark call for tax relief limit

Welcome to the world of private equity, also known as the “billionaire factory”, where already super-rich firms have used low interest rates and their considerable financial firepower to embark on a multi-billion dollar buying spree this year.

Mere mortals were this week given a rare glimpse inside the money-spinning and highly secretive private equity industry – which buys up companies, often using more debt than stock market investors would tolerate, then floats or sells them on again – as the London firm Bridgepoint floated on the stock market.

The float left 166 of Bridgepoint’s employees sitting on a combined £2.5bn windfall. The firm’s executive chair, William Jackson, sold £7.8m worth of shares, and hung on to a stake worth about £42m. Frédéric Pescatori, Bridgepoint’s head in France and southern Europe, cashed in about £16.5m and still had shares worth almost £85m. The finance chief, Adam Jones, sold £4m worth but retained shares worth £22.8m, following the stock’s 29% surge on its debut on Wednesday.

Bridgepoint also extended its largesse to well-known City figures persuaded to join the board. Archie Norman, chair of Marks & Spencer, received a £1.75m fee to become senior independent director (on top of his annual £200,000 fee for serving on the board). Three other non-execs, including Carolyn McCall, chief executive of ITV, were also handed £500,000 for joining the board.

Lord Sikka said private equity firms had “devoured Debenhams, Maplins, Toys R Us, Bernard Matthews, care homes and much more”, adding that high leverage and aggressive tax planning were the industry’s prime tools.

Bridgepoint – which is most famous for previously owning Pret A Manger and is now the owner of Burger King UK and the arts and crafts supplier Hobbycraft, and has a minority stake in the food chain Itsu among its £23bn of assets under management – is just one of dozens of private equity firms across the world reporting record-breaking returns as cheap debt and lockdowns, which have forced many companies to seek investment, have created the perfect conditions for deals.

“The great lockdown crisis toppled many industry forecasts and trends whilst reinforcing and accelerating others, including private equity, which arguably has never seen a more favourable environment for deal making,” said Dominick Mondesir, a senior European private capital analyst at the private equity research firm Pitchbook. “Deal activity has propelled to unseen levels, due to a combination of strong leveraged lending markets and an accelerating European economic recovery powered by the rising vaccination rate.”

Private equity firms have struck a record 6,298 deals worth $513bn (£373bn) so far this year – the most since records began in 1980, according figures from the data provider Refinitiv.

The UK has been a particularly fertile hunting ground for US-based private equity firms, as companies in the country have been seen as cheaply valued due to the fall in the value of the pound since the Brexit vote.

The supermarket Morrisons, infrastructure firm John Laing, industrial property developer St Modwen, UDG Healthcare, and the fund manager Sanne have all received private equity offers in recent months.

So far this year, PE firms have announced 124 deals for UK companies (both takeovers and minority stakes) with a combined value of £41.5bn, according to the data company Dealogic.

The American company Blackstone on Thursday reported a near-doubling of second-quarter distributable earnings to $1.1bn, sending its shares up 4.5%, gaining a record high market value of $131bn.

Jonathan Gray, Blackstone’s multi-billionaire president and chief operating officer, said: “When we look in the second quarter, in our private-equity portfolio, 98% of our companies had revenue increases. Across 2,000 borrowers in our credit area we had one default.”

Luke Hildyard, director of the High Pay Centre, which campaigns for executive pay restraint, said: “There are many examples of private equity firms doing very well from recent economic developments, but it’s important to ask whether society as a whole will benefit from this bonanza.”

Ludovic Phalippou, a professor of financial economics at Oxford University’s Saïd business school, sparked outrage among the industry by publishing an academic paper accusing private equity chiefs of paying themselves vast management fees.

In the paper, entitled An Inconvenient Fact: Private Equity Returns & The Billionaire Factory, Phalippou said private equity chiefs had paid themselves about $230bn in performance fees since 2006 despite on average achieving about the same return as a simple US stock market tracker.

“This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance,” Phalippou said.

He said the fees, which were ultimately paid by investors into private equity funds such as pensions, had helped turn 19 more private equity bosses into billionaires since 2005, taking the total number of private equity chiefs with nine zero fortunes to 22.

“The private equity industry may need to rethink its business model, lowering costs and reconsidering how performance fees are paid in order to remain sustainable. This, however, will probably generate fewer billionaires,” Phalippou noted.