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The rise of private equity ­reveals reality of capitalism

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Private equity firms have collected huge profits in recent years, Simon Basketter explores the rise in buyouts and deals
Issue 2772
Stephen Schwarzman, the CEO of American firm, Blackstone is a leading buyout investor
Stephen Schwarzman, the CEO of American firm, Blackstone is a leading buyout investor (Pic: WikiMedia/World Economic Forum)

Plundering is enjoying an unprecedented boom. The global value of deals carried out by private equity firms is set to reach $1 trillion (£723 billion) for the first time this year.

And private equity firms have an estimated £2.5 trillion waiting to be deployed in takeovers.

The buyout barbarians are targeting Britain, where public companies, those listed on the stock market are trading on low valuations.

Private equity firms have struck more deals in Britain in the first half of the year than in the same period in any other year.

The number of buyouts is up 60 percent in 2021 compared with the same period in 2019.

Private equity firms have announced approaches to 13 listed British companies since the start of 2021.

European head of private equity at Blackstone says, Britain’s “pro-business environment” is why, “there is no shortage of opportunity”.

Private equity works like this. You and I decide we want to start a firm.

We raise money from clients and put it into a fund in a tax haven.

We find a few companies we want to buy, using a bit of our own money (equity) but funding as much as possible with debt, or “leverage”.

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We then sell or float the companies on the stock market at a profit after cutting costs or selling assets. We return the cash to our investors.

Before doing that, though, we take our cut—known as “carried interest”—20 percent of the profits above a certain amount.

Because we’ve invested some of our own money in the fund, we get to take this as a capital gain rather than income. That means it’s taxed at 28 percent, not 45 percent.

Between 2006 and 2015, private equity bosses pocketed at least £165 billion of carried interest.

There were three private equity multi‑billionaires in 2005. There were 22 by last year.

Charges associated with the private equity buyout, such as fees for completing the deal and annual management fees, are put onto the acquired company’s accounts, not the private equity fund.

Typically a £10 billion deal produces an immediate fee of £50 million (a 0.5 percent fee) for completing the sale and £30 million a year in management fees.

This is on top of the enormous fees the accountants and lawyers who oversee the deal make out of the process.

Shareholders of supermarket chain Morrisons vote on a private equity offer next month.

Morrisons’ freehold land and buildings are worth about £5.8 billion.

That is more than the market value of the company as a whole.

So even without selling stores, new owners could boost their returns by borrowing against their value.

One 2019 study found that when firms buy listed companies, 13 percent of jobs are cut over two years and the wages of those remaining go down.

If a buyout goes well, private equity bosses receive huge returns.

If the company goes bust, the private equity company sells off the assets to pay debts.

Private equity does capitalism’s dirty business in the dark. But it’s not much better in the light.

A public company, quoted on the stock exchange, is a tiny bit accountable to shareholders though not to the rest of us.

So Debenhams was plundered by private equity in the early 2000s but when it sacked all its staff and shut all its shops it was a stock market company.

For bosses, taking money off the back of workers is the most important thing.

Private equity is not the “unacceptable face of capitalism”, rather it shows the reality of how this system works

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