Private Equity gets its way while taxpayers foot the bill
By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets
Late this week, the Treasury caved into pressure from an industry body for Private Equity houses, and allowed portfolio companies to access government-backed loans to help survive the pandemic. These companies were previously excluded due to the balance sheets that result from private equity ownership.
Private Equity firms are sitting on and spending record levels of cash. They easily have the funds to support their portfolio companies, but to do so is complicated and possibly not viable due to the agreements used to start each fund. Some funds have used their cash to do this, but the majority have not. The struggling companies are probably in older funds that have already used the majority, if not all, of their capital, therefore money would have to come from newer funds. I do not doubt that they could find a way to do this if they wanted too, but in fairness, it is a complicated area. Instead, they have threatened and cast dire warnings of huge job cuts if they received no money. A clever strategy, but one that leaves the industry looking rather heartless. I will let the reader judge the morals of such approaches.
These companies should be allowed access to backed loans; however, the terms should be different. As an interested bystander, I would expect these loans to come at some cost to the PE houses that begged for them. They have claimed that the business cannot be viable without this access, so they should pay for that privilege. Just as start-ups have had to offer equity to access the government-backed Future Fund. The terms should have looked similar to the deal penned for UK start-ups, a loan that turns to equity in the company. That would enable these PE-backed companies to survive, but it would also give the taxpayer a return. These companies are arguably a higher risk than the average due to the highly indebted balance sheets. The PE houses themselves will make good returns so why should the government not, when they are ensuring these businesses stay viable. These PE backed companies are also often structured to pay as little tax as possible, again a great strategy for returns but not a good look when you come back in trouble times with your hands out waiting for assistance. Naturally, most companies are structured to reduce tax payments, but PE houses are experts at this and arguably go further than the average.
I am far from completely negative on PE as a sector; these funds do add value, and the historic model of stripping companies bare may well be over. These firms are now making profits from increased growth rather than decreased costs. You have to admire how these PE houses run as the pinnacle of a capitalist society. However, these firms are now trying to hold on to their cake and eat it. The government seems to have disappointingly caved to this pressure and let the sector have its way without any guarantees or benefits for the taxpayer.
This will not be a popular decision but it should save jobs, which is desperately needed in the current economy. Let’s hope that this concession will prevent extensive job cuts in these business, otherwise the Treasury will be left looking played by these PE houses.
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