Survival has become the sole focus of many British businesses. One of the areas of the economy hardest hit by the lockdown is the high street. Many of the midsized companies under threat are owned by private-equity funds, which went on a decade-long spending spree in sectors such as hospitality, travel and retail. Faced with tens of thousands of jobs potentially being lost, the UK government is now considering ways to offer companies owned by buyout groups access to state-backed loans without falling foul of EU state aid rules. Saving jobs is important, but this is not the right way to go about it.
Private equity-backed companies such as restaurant chain PizzaExpress and Merlin, the owner of Legoland, are among those hit hard by the pandemic. Many of their peers have been unable to apply for coronavirus emergency loans due to their high levels of debt. EU state aid rules say companies whose losses exceed 50 per cent of their share capital are ineligible for government support. The PE industry is now asking for explicit guidance to banks to allow them to treat shareholder loans as equity as a way of getting round the state aid issue.
Offering taxpayer money to an industry whose financial model is based in part on reducing the amount of tax it pays would be controversial at the best of times, and even more so today. Britons face the prospect of higher taxes to help pay for the billions of pounds the government has spent to keep the economy afloat during Covid-19. It would also send the wrong signal after ministers decided not to extend the furlough scheme.
Private equity is all about risk. Funds are notorious for allowing their portfolio companies only a slim financial cushion to ride out economic downturns. Investors who buy into these businesses know that there is an increased risk of insolvency. Recent figures also show the industry has unspent cash totalling almost $2.5tn. The reality is that jobs will be lost but if policymakers want to avoid a bloodbath on the high street, there are other measures to consider before offering ways to access state support.
Restructuring of balance sheets should be the first course of action for these companies and their owners while ensuring minimal disruption to continuing business activities. If needed, there should be a writedown of shareholders and current creditors first. Only if this is insufficient should a taxpayer-backed loan be considered. In this case ministers should attach tough conditions; the industry’s lobbying powers are well known.
Numerous companies have flourished under private equity ownership. They contribute to the wider economy in employment and taxes. But even before coronavirus private equity was facing questions over its practices. There have been many examples of funds risking a thin sliver of their own money as equity, providing the rest of the finance their companies need with debt and then walking away from investments that go wrong. Many have paid themselves big dividends from increased debt.
The industry has much to lose in the public court of opinion if it is seen to shirk its responsibilities in today’s crisis. Funds must show they are using all of their own resources to keep their businesses alive. Here, greater transparency would help. Pension funds and others often pay high fees for what they are told is better management on behalf of the industry. PE funds are experts at financial engineering. Now is the time to put that expertise to good use, and not rely on a helping hand from the government.