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Asset strippers are preparing to feast on Britain’s COVID-ravaged economy
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This process of asset sales, corporate restructuring and financial engineering delivers spectacular short-term returns for the new owners. Uniquely, these returns, which are referred to as ‘carried interest’, are taxed as capital gains rather than income. This means that private equity executives often pay lower tax rates on their multi-million-pound bonuses than many salaried workers.

But this short-term profiteering often comes at a price of undermining the long-term viability of the company, which is left paying interest on the debt taken out to purchase it; rent on the properties it previously owned; and management fees to its new owners. This, combined with aggressive cost cutting, often undermines quality and standards, leading to eventual decline and – in some cases – bankruptcy.

Unlike publicly listed companies, private equity owned firms do not need to publish regular accounts. Without a plurality of shareholders to hold the company to account they face far lower levels of scrutiny, and often make extensive use of secretive offshore tax havens. As a result they operate largely behind closed doors.

Morrisons isn’t the first UK supermarket to be targeted by private equity. Last month the Competition and Markets Authority cleared a £6.8bn debt-fuelled acquisition of Asda by the billionaire Issa brothers and private equity firm TDR Capital. The latter is renowned for using complex financial engineering to deliver spectacular returns. In 2013 the firm bought the gym chain David Lloyd using £190m of its own money and £529m in debt. Since then, TDR has extracted more than £550m in dividends and other repayments – almost three times its initial investment. That has been achieved in part by loading new debts onto the company, which now owes more than £1bn.

With Asda already in the hands of private equity, many fear that a takeover of Morrisons would not only pose a risk to the company’s staff and suppliers – it could also trigger further buyouts in the sector, leaving a vital part of the economy operating largely behind a veil of secrecy.

As one retail analyst recently told The Guardian: “The whole industry is now in play. It’s not unrealistic to say that there could not be a single quoted British supermarket left in the foreseeable future.”

A trail of destruction

Private equity buyouts are not new; since first emerging in the 1980s they have become an increasingly important part of the corporate landscape. The supermarket industry is just the latest in a long line of sectors to be targeted.

Among the hardest hit has been Britain’s care home sector. Lured by the prospect of steady income streams and large property portfolios, over time private equity firms have become a major player in the UK’s care system. But in recent years their impact has been widely criticised. Since 2011, two private equity-owned care home chains, Southern Cross and Four Seasons, have entered into administration. Cash extraction, unsustainable debt and rent obligations and a complex corporate structure have been blamed for the collapse of the chains, who between them provided care for 45,000 residents. In the case of Four Seasons, the company’s sprawling structure consisted of 200 companies arranged in 12 layers in at least five jurisdictions, including several offshore territories. A 2019 report by the Centre for Health and Public Interest, an independent think tank, concluded that the financial crisis in the care sector is in part due to significant levels of “leakage” – excessive spending on rent, dividends, interest payments and management fees rather than care provision.

Britain’s high streets have also fallen victim to private equity. The collapse of high profile retailers such as Debenhams, Cath Kidston, Toys ‘R’ Us, Poundworld and Maplin has been linked to their periods of private equity ownership, when the owners sold and leased back properties, saddled the companies with debt and extracted large dividends. A recent investigation by Channel 4 found that almost 29,000 jobs were lost when these companies entered administration or liquidation, after their private equity owners had extracted billions in dividends.

Since the 2008 financial crisis, the low interest rate environment has triggered a renewed wave of debt-fueled private equity takeovers in sectors as diverse as North Sea oil and gas and veterinary practices to foster care firms and restaurants chains. This surge has led to a dramatic transformation in Britain’s corporate landscape. According to a recent review commissioned by the UK government, the number of listed public companies in the UK has fallen by about 40% compared with 2008, with a growing portion of the economy shifting into private and often unaccountable ownership structures.

Now the economic fallout of the COVID-19 pandemic means that this is likely to accelerate even further.

Pandemic profits

For the private equity industry, the COVID-19 pandemic represents a potential gold mine. Fund managers are reportedly sitting on a record $1.7trn of so-called ‘dry powder’ – money that has been raised but not yet spent – and are scouring the globe for vulnerable targets to prey on.

The UK, with its relaxed approach to corporate takeovers, is providing a lucrative hunting ground. Elsewhere in Europe, tighter scrutiny of foreign takeovers and stricter labour laws makes the private equity model less practical. Moreover, the UK’s departure from the European Union has created favourable conditions to pick up a bargain. Investors have pulled more than £29bn from UK equity income funds since the Brexit vote in 2016, which many believe has left the UK stock market undervalued compared to its US and European equivalents – and British companies looking like “easy prey”.

Many British firms have struggled throughout the pandemic, and have been forced to take on significant amounts of debt to survive. High street firms have been hit by the rise of online retail and home working, while city-centre commercial property values have plummeted – creating opportunities to pick up real estate on the cheap.

[1] Url: https://www.opendemocracy.net/en/oureconomy/morrisons-private-equity-asset-strippers-preparing-to-feast-on-britains-covid-ravaged-economy/