The logic of private equity capitalists is contrary to everything that it seems that sound government, good governance, sensible pension fund planning, and long-term thinking should stand for. So why is Labour besotted with it?
The audio version is:
This is the transcript:
What is the obsession with private equity all about? I have to ask the question because it is very clear that the UK government, amongst many other governments, is completely obsessed with the use of private equity capital to somehow transform the economy of the UK. And I'm here to tell you that that is a very dangerous idea.
Private equity capital has been around for a long time. Back in the 60s and 70s, when I first became aware of it, private equity capitalists were called asset strippers. And let's be totally blunt, nothing really very much has changed since then, except they have managed to invest a great deal in their public relations activity and put on a veneer of respectability that now affords them the opportunity to influence government and persuade government ministers that they are our future, plus the future for our energy transition and the future for our national wealth fund and most especially the future for our pensions. And all of that is complete nonsense.
Let's explain what private equity does. It identifies a company that exists, because it does not create new companies or ideas. It identifies a company that exists that does need more funding, in the opinion of the private equity fund, to realise its potential. It persuades the management that this is the case.
It takes a stake. In other words, it buys a share of that company and might well loan it additional money that has conditions attached to it. And as a result of its investment, it will require that the management of the company in question go for maximum growth. That is the object of private equity. And the reason why they want to go for maximum growth is that they want to create assets that they can sell.
Now let's be blunt about this. Private equity is not a long-term player in the vast majority of the businesses in which it invests. It is instead a short-term manipulative and speculative activity, the sole purpose of which is to create assets in a form that can be sold and traded in financial markets.
Let me be clear then that the value that private equity creates is not necessarily of the sort that society wants.
Nor is it of the sort that the original owners of the company in which private equity invested might want.
It isn't also necessarily of the sort that the employees of that company might want because many of them might have discovered that private equity has resulted in them losing their jobs during the period in which it is involved with the company in question, because outsourcing is one of the favourite activities of private equity operators, because that makes it easier to sell on the assets that they are creating.
No, private equity creates a return, which is solely for the benefit of the private equity operator, and they don't care about anybody else.
I have to be honest, they are honest about that fact. And I suppose we should welcome that. They are at least candid that they are in this game purely to advance their own interests. But, despite that, we have seen people like Rachel Reeves fall for their charms. Why has she done that?
I have to be honest and say that I believe that's simply because private equity has decided to align itself with Labour because they see the opportunity to secure influence to advance their cause.
And have they done that? Yes, we know they have. How do we know that? Because we have seen them win some arguments that we expected the government to pursue. For example, we were expecting Labour to be extremely harsh on the taxation treatment of private equity funds, and it's actually been pretty generous.
So, private equity has already won from supporting Labour, and has no doubt rewarded Labour as a consequence, which is why politicians fall for these people. They have pots of money, which are firstly used to subvert the political process and secondly used to undermine democracy in their best interests.
But let me also be clear why this is so dangerous. Rachel Reeves has said that we are creating a National Wealth Fund in the UK. This is complete nonsense. What she's doing is giving about eight billion pounds as a bung to the private equity business. And she is claiming that this will, to use her phrases, ‘catalyse' £70 billion of investment in the UK economy.
Now, what that means is that she will become, as a government minister, a member of a syndicate that is investing in private business in the UK, and she hopes that the private equity operators will pay the government a decent return as a result.
Frankly, if that £8 billion wasn't provided by government, the remaining £62 billion, which is what she thinks Is going to be available, would be available anyway if the opportunity for the private equity operator existed out there in the market in any event. So, all she is doing is buying a stake in a private equity syndicate.
And the same is exactly true of GB Energy. GB Energy is not going to be producing energy. It is not going to be creating a sustainable future for us. GB Energy is another private equity fund that is going to invest alongside others in the creation of supposedly sustainable businesses in the UK, but with a very short-term horizon in use because all private equity operators have very short-term horizons and that short-term thinking is, of course, exactly contrary to what is required by both our National Wealth Fund and by GB Energy because both should be long term investors.
The Labour Party has fallen for the con and they now also want private pension funds to fall for the con as well and that to me is disastrous because private equity does not make a return for pensioners. It makes a financial return for private equity operators. Now, it is entirely true that pension funds can invest in private equity operators and therefore make money. But in the process of creating that return, private equity normally destroys value.
Many of the companies in which it invests cease to exist. The whole point of private equity investment is to groom a company for sale, having stripped out the value within it in as many ways as possible before that final sale takes place, precisely so that the return is maximised to the private equity investor. That is what asset stripping means. The business and the company is stripped down into as many component parts as possible, each of which is considered saleable in its own right. And the fact that at the end of this there is nothing of value left from the original idea doesn't matter. In other words, the potential that existed in that company, which was the reason why investment took place in the first place, is actually dispersed in most cases by private equity and value is destroyed.
But so too, over many years of history, have employment opportunities been destroyed. I've already mentioned the likelihood is that in many private equity invested companies there will be a reduction in employment because those employees will be outsourced, because something as messy as employing people is not the type of financial operation in which a private equity investor wishes to be involved.
And we've seen this, for example, in the case of care homes, or we've seen it with regard to transport, where agencies might be used instead of employees. All of this is typical private equity activity. The only thing they're interested in is the asset. How it is serviced by people doesn't worry them because they can hire those people in as expendable resources.
That is how they treat people. So, the very idea that pension funds should invest in these private equity operations to provide value for pensioners, whose jobs are actually undermined by the private equity operation is absurd.
Private equity is a force for destruction within our economy.Why does Rachel Reeves believe otherwise? I wish I knew because there is no logical explanation, except for the funds that private equity has provided to the Labour Party.
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Might a possible answer lie somewhere between the classic negative poles of ideological blindness and unenlightened self- interest?
National Audit Office offer some advice re PFI/‘partnerships’ https://www.nao.org.uk/insights/heres-how-to-make-public-money-work-harder/
On PFI ‘“With the bulk of PFI contracts expiring from 2025 onwards, there is still time for government to make changes that will help public sector bodies to exit from contracts successfully.
“If government does not provide strategic support and public bodies do not prepare sufficiently, there is a significant risk that vital infrastructure such as schools and hospitals will not be returned to the public sector in the right condition and taxpayers and service users will bear the brunt of additional costs and service disruption.”
It would appear that Starmer has fallen for them as well as Reeves
This was the progressive pulse take on it
https://www.progressivepulse.org/economics/a-quite-amazing-tweet-from-the-prime-minister
And today….
Black Rock will be extracting handsome profits for, as the article says:
when asset managers own significant chunks of infrastructure, their priority is their investors (including sovereign wealth funds and pension funds), rather than society, or even the planet.
https://www.progressivepulse.org/economics/the-supplicant-state
Are they stupid or wicked?
I have no idea.
The motivation for Starmer & Co’s actions may well come from stupidity and wickedness but if you ask me it is principally greed.
Prem Sikka has also noted (Apr 2024) that “Private equity is predatory capitalism with a long trail of destruction”
https://leftfootforward.org/2024/04/private-equity-is-predatory-capitalism-with-a-long-trail-of-destruction/
And Prof. Daniela Gabor writes : “Labour is putting its plans for Britain in the hands of private finance. It could end badly” (Guardian, July 2024)
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
“Handing vital infrastructure to private investment companies will generate windfalls for investors and leave the rest of us worse off”
I agree with them
In theory, Private Equity (PE) can be a force for good…. “dozens of small firms with great ideas can’t get the investment they need to grow and the lovely PE folk provide that finance”. In practice, early stage seed capital is provided by Venture Capitalists (VC) and PE only steps in much later in the story once the company has a real business rather than just a dream. One could argue that this is a valuable activity and there are (some) examples of this happening.
However, the “classic” PE target is an existing “family firm” with a solid business and low debt; the current owners want to cash in (founders getting old, kids not interested etc.) and PE buys it, loads it with debt, extracts dividends/interest and then sells it (see Thames Water).
I can understand why a government might want to encourage the former activity but (i) how do you do the former but not the latter? (ii) what does government bring to the party? (iii) Has not the government got a long list of investments that need funding the PE can’t fund (infrastructure etc.)?
Also, I think the PE model is in real trouble. It is easy (ish) to find good prospects but it is proving tough to sell on the existing portfolio. Frankly, the stated values of many companies in PE portfolios are a fiction. I think many PE firms are clinging on in hope that they can sell their portfolios but the chickens will come home to roost. Why the government wants to be a part of this I do not know. What will happen is what happened to the the current owners of Thames Water (various pension funds) – the original owners (Macquarie) take all the money and sell a pup. I fear that the UK government will become the “pup buyer of last resort”.
Accounting rules are letting PE con the markets. Returns are based in the valuations they put in their assets, many of which are profoundly subjective, shall we say?
In fact, for ‘start ups’ even the VCs look for someone else to take the first risk. Famously, the first funding for Google to develop its algorithms was provided by a grant from the Federal government; the public sector took the first risk, and private capital waited to see if that produced something that made it easier for them. Private capital doesn’t like taking risks with its own money. In the US, however private capital is a far more conducive environment for start-ups (it is their heritage), than the UK. It is far worse for ‘start ups’ over here. They are encouraged to scratch around for Grants of one kind or another first (invariably from the public sector), and even then it is still much harder to become successful enough to prove to the private sector they are worthy to receive private equity support; unless the applicant is already able to show it is successful: Catch 22, the definition of VC and PE.
I might have mentioned this before but Pizza Express has been through several Private Equity hands each time bought with funds borrowed by the Business noy the new owners.
Total debt is now in the region of £1 million PER BRANCH
Its a Pizza Restaurant for (insert a large number of words learnt whilst serving as a stoker in the Merchant Navy) sake.
The comment made after Ever Ready was sold on after being taken over by Hanson Trust was that a leading company in its field had been wrecked, all the new products and innovation scrapped – things that might have had a wider impact than just on the companies profitability.
Much to agree with
I worked for Ever Ready until I was made redundant in 1980. I actually worked in the European division and had spent a year in the Netherlands setting up a European warehouse and distribution centre. Prior to the European centre all batteries, including those sourced from the German subsidiary, Daimon and the Italian subsidiary, Superpila, were transported to the warehouse in England and then re-exported to European customers.
Six months after the European warehouse was running and 150% better than budget, although still just loss making, a new board decided to close down the whole European operation . They wanted the short term inprovement on the books and sacrificed the huge investment already made.
Hanson took over the following year. Hanson destroyed the company, but it was on its way before then.
That was an incisive summary of the issues. I hope that is one the Youtubers do not switch off before the video is finished.
There is however an issue about the difference between a ‘private equity’ firm, and a ‘hedge fund’. The problem here is that the conventional wisdom of the financial sector is that the difference between them is measurable (and distinguished) by whether they are long or short term investors. You do not mention the distinction in the piece, but the question i would ask of the distinction is twofold.
1) What actual substantive forensic research has been done on ‘ investment holding times’ in the market of both sectors, in order for that distinction to be asserted.
2) Just how long is a piece of string?
Hedge Funds and Private Equity are quite different. There may be a some HFs that operate similarly to PE but they are few and far between.
PE holding times (if all goes as expected) about 5 years. Companies may be sold earlier if they can be sold at the valuations the PE fund wants…. but right now, holding periods are getting longer as there are fewer and fewer buyers for the companies they want to sell. Indeed, I suspect there will be big problems soon.
Hedge funds cover a massive range of funds. For a start, many (most?) don’t trade companies or shares in companies at all. They trade bonds, currencies, commodities. Those that do trade equities will trade shares of listed companies (PE, almost by definition) is about non-listed/traded companies. Holding times will typically be much shorter. Indeed, when I traded the holding time for my positions would typically measured in seconds rather than hours, days or years.
There are big issues about the purpose, modes of operation etc. of both PE and HF but they are different.
Thanks
I take your point as a general rule (but your second sentence implies a looser definition than your first sentence implies). Ironically didn’t Hedge Funds (HF) take-off in the 1990s when the mutual industry was deserted by investors (and the management reinvented themselves)? There are nice distinctions to be made between private equity (PE) and venture capital (VC), but it doesn’t really tackle the problem of the way they see or do business. There is a difference between rules (applied by a business defining its area of operation), and regulations (rules with ‘teeth’, applied by an outside regulator). British regulators are rarely ‘up to much’, but I would rather depend on regulations in principle, than rules. Now for the base question. From PC, VC and HF – which is the least regulated? Somebody, I hazard may opportunistically reinvent what Hedge Funds will invest in, given a set of circumstances arising, that have occurred to nobody.
I confess I am a Pyrrhonian inclined sceptic, and trust nothing.
Clive, I think I have been barking up the wrong tree, and you have provided correction. I had to acknowledge the fact. As far as I can find UK Hedge Funds (second only in size to the US in this market) hold assets of at least £1.5Trn under management. Much of this must be in Gilts and currencies, I surmise (I have not done the research), but must surely play a very significant role in the gilt market. HFs are short term investors, presumably profit maximisers (so not just in Gilts for the coupon). This leads me to quite different questions. Just how big an influence are they in the market? At what point does influence become management? We live in an age in which cash (the only element in which Government/Treasury directly serves the people) is shrinking as a share of the credit for which Government has the responsibility to manage. At the same time the commercial Banks, dealers in credit have become dominant in the credit used as money (under licence); and the BoE ostensibly ‘independently’ manages the financial system, and its regulator – not for the first time – is shown to be profoundly defective*. In this environment, in what sense is the Government/Treasury actually in control of the whole financial system for which it is responsible, how independent are its decisions, and how effective is it?
* “The Financial Conduct Authority (FCA) has been labelled “incompetent at best, dishonest at worst” in a damning report by a cross-party group of MPs and Lords.
The report, compiled by the All-Party Parliamentary Group (APPG) on Investment Fraud and Fairer Financial Services, accuses the FCA of systemic failures, including regulatory inaction, cultural defects and inadequate handling of whistleblower evidence.
The 358-page report, based on testimony from 175 individuals — including whistleblowers, scam victims and current and former FCA employees — paints a troubling picture of the watchdog’s operations.
It criticises the FCA’s leadership as “opaque and unaccountable” and claims its actions have been “slow and inadequate” in addressing financial misconduct.
According to the APPG, recent efforts to reform the FCA have failed to resolve its deep-rooted problems.” (MoneyMarketing, 26th november, 2024)
John
Hedge funds do arbitrage. Any asset where there is a price differential at a point in time or over time is good for them. Gilts offer that opprtunity.
Richard
I appreciate that, but at what point does their position in a given market (a function of scale and I can’t quantify it – it is a thought experiment), allow them not just to benefit from arbitrage (between markets), but to influence prices in that market?
Let me take an exaggerated example, for illustration only; the Bunker Hunts, if I recall attempted to corner the silver market fifty years ago. Yasuo Hamanaka tried the same thing in copper in the 1990s. In Gilts I stress am not thinking of ‘cornering’ that market (it makes no sense), but through scale, exerting “influence” over prices? And although unlikely at the individual Hedge Fund level, to what extent are Hedge Funds as a focused sector activities in Gilts and currencies distorting prices, and interest rates?
n BoE Working Paper, 1032 ‘Hedging, market concentration and monetary policy’ (July, 2023), the paper says this:
“First, some NBFIs – including LDI-PI, asset managers and hedge funds – are highly exposed to volatility in interest rates, which has implications for financial stability. Depending on their use of short-term funding and liquidity preparedness, this could lead to fire sales in core markets when there are sharp moves in interest rates, such as during the 2022 gilt market crisis in the UK. Second, the degree of concentration in the interest rate derivatives markets could lead to greater risk of market disruptions. A small number of participants account for a large share of interest rate exposures, which could lead to dealer losses and infrastructure disruptions as they are hit with uninsurable idiosyncratic shocks. This echoes the recent findings of Pinter (2023) that during the 2022 gilt market crisis only a few investors were responsible for the majority of gilt liquidations. Third, our evidence suggests that this market concentration could impair the transmission of monetary policy to interest rates. It could also limit the signal that monetary policymakers should infer from these markets about macroeconomic developments and policy expectations.” (BoE, WP 1,032, p.4)
My concern is on the development of “market concentration” by the largely unregulated activities of Hedge Funds in gilts and currencies, but that both increases risks, and spills over into direct impact on policy decisions in monetary policy because of market concentration, harmful to all other users of the economy.
Long before I knew anything about economics, capitalism or “the money question”, I used to wonder why so many successful and popular small businesses felt that they HAD to grow to survive, and then take on debt (in those days that usually meant a bank loan).
Then a combination of rocketing (oil price) inflation in the 1970’s, and more recently, criminal bank middle managers (see Noel Edmunds, “Spank the Bankers” for more info https://www.imdb.com/title/tt10917024/ ) meant the end of those companies or at least the end of the USP that drove them forwards in the first place and provided a service to their customers (affordable widgets that really worked).
Then the financial process got industrialised, legalised and renamed venture capitalism which is what you describe here? And now it has moved into public services, not to “serve the public”, but to pillage our utilities and services, much like the Vikings raided our coasts or Francis Drake raided the high seas.
Government, including our present Labour In Name Only (LINO) robber barons are in this up to their necks.
I’ve never been a merchant Navy stoker like Mr Boxall, but I learned a lot of words in farmyards that I couldn’t use in church, that apply to these destructive vultures. I pray daily for their just destruction.
Looks like “Spank the Banker” is available to view online for a modest fee at:
https://www.paradisofilmsproductions.com/spank-the-banker-1
“Feature-length documentary film about the biggest bank robbery in history: the systematic bankrupting and looting of over 100,000 small firms by their very own bankers, in the aftermath of the 2008 financial crisis.
In all, the banks grabbed a staggering £100 billion from their small business customers, crushing much of the economy and ruining lives.Yet apart from some small fry, no senior banker has gone to jail.”
I tried following Ian’s link to Spank the Banker but it looks as though the film is no longer available on that site.
Incidentally, a search on ‘spank the banker’ brought up some *very* ‘interesting’ results…
I’d rather not go there….
My family knows all about private equity. It bought and basically asset stripped my Dad’s old firm in the 1970’s under a Labour government who mistook the short term profits it makes for long term growth. It wrought havoc to us and many others.
Thus we can see that Laboured’s policy is a political project to deliver short term party political objectives only and not really a policy with anything like long term benefits for the likes of me and thee. The political objectives can only be in line with that of their funders, which is to make money out of it nevermind the risks or consequences.
What is fundamentally wrong about this is that in the LGPS ( if funds like this will be used) it is also made up of our own contributions but it seems that this has all been decided and we have no say in it!! They are playing with the members money as if it was their own.
This all looks very dubious to me. But also, we have been here before and forgotten it seems everything, indeed we seem to be doubling down on some of the worst ideas I have ever seen.
This redolent of some profoundly nihilistic thinking, and reeks of a last ditch land grab of anything of any value before society all goes down the toilet.
Which it will. I think all this theft by the rich is just their preparation for the end, whatever that might be.
As for the rest of us, well it is obvious that we do not mean anything at all.
Thanks
Richard…. this may be naive but it is a genuine question.
If private equity hollows out a company in preparation for sale, leaving it but a facade of what a sound business should look like, and this is widely known, what motivation is there then for anyone to purchase said company?
Fools are continually parted from their money
Most acquisitions fail
Now you know why
Good question….. and the answer is that there are not many buyers about – certainly not at the prices that PE are hoping for.
Having nothing left to sell doesn’t matter. Assets have been stripped, bonuses paid to senior execs, dividends paid to shareholders, so that leaves employees, and unsecured creditors (like suppliers & customers & contractors) and those payouts were probably unjustifiable or affordable by the company, on the basis of its stripped down state and real-world trading accounts.
But those people don’t matter, so the company can be quietly (and usually unaccountably) bankrupted.
Thank you very much for sacrifice, you have made some rich people richer – good luck & who is next for the VC conveyor belt? It’s all in a good cause, to finance party donations and think tanks.
Rob, I understand they sell off the good bits first, leaving very little but a shell of a business. Someone may correct me?
In my experience there are other short term practices routinely deployed by private equity or “vulture capitalists”. The term “running the business for cash” is used. All cash is stripped out on a daily basis. Supplier terms are aggressively renegotiated and payment terms extended sometimes to 120 days. Receivables are aggressively managed. Employee terms are renegotiated with benefits removed or reduced including pensions. The EBITDA is manipulated to increase sale value when sector multiples are. Debt is taken on at increasingly punitive rates as the risk grows.All the “professionals” take fat fees from refinancing and the Directors are highly incentivised. There are many examples of healthy businesses that have passed through multiple private equity hands and flown into the ground.
Even The Telegraph’s Liam Halligan gets it (in response to a tweet by Starmer boasting about the UK’s need for “partnership” with Blackrock)…
“An ASTONISHINGLY ill-judged post from @Keir_Starmer
What the hell is the motivation behind this public love-in with a hard-nosed commercial investor? It’s so needy and naive.
I can only guess that his plunging poll ratings mean he is already working on his career plan for when he leaves office !!”
https://x.com/LiamHalligan/status/1859854119894216799
Weird, isn’t it?
“needy and naive” is quite apt. Prime minister Starmer and chancellor Reeves are private capital’s greatest wish come true: willing dupes obsessed with the myth that government is like a (deeply-in-debt) household.
Its so depressing.
They are so wedded to the idea that govt shouldnt ‘spend money’ – ie in Daily Mail terms – squander it – that they see the magical thinking of private equity as innoculating them them from any such accusation.
From the outset Starmer and Reeves – have never been prepared to say to the public – we will invest in solar and wind – and get a return , yet they are happy to give bungs to short term asset strippers because deep down they belive that only ‘the private sector’ creates growth.
These vested interests bought up Labour well before the election – with their ‘donations’ so it should be no surprise.
[…] Why do Labour believe in private equity? Funding the Future […]
“Vulture Capitalists” have been mentioned; the name by which venture capitalists have long been widely known (I was first introduced to the term many years ago in London, by a venture capitalist). Here was a standard ploy, even decades ago. A young fast growing, interesting business that genuinely needs capital to move forward, is made a very attractive offer, structured as an ‘earn-out’ over a number of years by a vulture capitalist. It looks an amazing deal to the owners, allowing them to keep some level of control of the business they created. The problem arises if (or more typically when) the trip-wires in the agreement are called on by the vulture capitalist, if a target is not met. Then, huge penalties built into the agreement are enforced, the company is wholly taken over by the vulture capitalist, and the old owners pushed out, at little cost. A cynic would say the earn-out was designed to fail.
John
I have done VC. The VCs added precisely no facts t9 the business and behaved as you describe. I left. It was not fun.
Richard
I was involved, once ‘from the other side’. It took us very little time to judge they were best avoided.
I could not persuade my co-directors in this case
Most lasted little more than a year or so
Why does this Labour government believe in private equity firms?
Because this Labour government is too scared to do anything other than follow current economic orthodoxy.
Do not expect any break with orthodoxy from no steer Kier and PPE Reeves.
Labour is too scared:
to think big like the Atlee government.
to upset the City.
to remove the subsidies that the City enjoys.
to challenge the ” truth” that only the private sector knows best.
to acknowledge the truth that private equity destroys companies and gets out leaving someone else to lose the big bucks. Think Macquarie with Thames Water. Who loaded the company with £15bn of debt, no updated infrastructure. Now 32% of the shares are owned by the Ontario Municipal Employees Retirement Fund and the UK Universities Superannuation Fund has 20%. Guess who ultimately pick up the bill? The public.
to use the state to improve the lives of UK citizens.
There is a saying with amateur sports players ” all the gear and no idea”.
For this Labour Government it’s power but no ideas how to use power for the benefit of the majority.
Much to agree with
The lobbyist with the deepest pockets rules. Especially if they also can offer the prospect of a cushy highly paid directorship or consultant role for when the political career ends.
Is this what was described as ‘the unacceptable face of capitalism’ by (IIRC) the Conservative prime minister Edward Heath?
Yes
I understand that Musk and Thiel & Co have ambitions to destroy centralised governments and replace them with governance by private corporations. Presidents and Prime Ministers to be replaced with CEOs like themselves. It would seem that GB’s ruling class have already partially capitulated to such corporate capture: https://europeanpowell.substack.com/p/what-were-once-1960s-libertarian
Maybe
It is more complicated than that