Their managers are highly incentivised, almost always male, and much more focused on profits than regular business owners. They are also experts at minimising any UK tax payments.
But rather than being great wealth creators, private equity firms are wealth extractors.
Despite the surge in takeovers and restructurings, the bulk of the British public still has little idea what “private equity” means, or how much of the UK economy these firms now control. That’s partly because British politicians have been complicit in allowing the spread of the private equity sector, but also because acquired companies usually continue with the same trading names and offices, and the process of reorganisation takes place behind closed doors.
The result is that very few consumers realise how many British household names are now owned by private equity firms. Morrisons is owned by a private equity firm. So are Travelodge and the AA. Also Madame Tussauds, Hovis, English Premiership Rugby and Center Parcs. There are hundreds of them – private equity firms now own businesses in the UK with a total workforce of 1 million people. Many of the most powerful private equity firms are from the US. In 2021 the former City minister, Lord Paul Myners, commented archly on the ease with which US firms were buying up UK businesses, saying “Britain is open for business in the same way that a car boot sale is open for business.”
Private equity is predominantly American-owned: of the top 20 private equity companies 17 are from the US and most of these are active in the UK. Following behind these giants is a host of “boutique” private equity outfits, often owned by big US banks such as the subsidiaries of Morgan Stanley, Citigroup and Bank of America.
Even within this wider group of two hundred operators, three-quarters are American. And, in the last 20 years, the UK economy has welcomed them to a feeding frenzy, transforming the UK’s commercial landscape – not just changing who owns the UK but how business is done. Many of Britain’s most profitable businesses are private equity-owned, which means they are more cut-throat, less accountable and usually highly “tax efficient”.
The private equity groups who have been restructuring British business over the last decade have been led by KKR, Blackstone, Apollo, Carlyle and Bain Capital. Between 2022 and 2023, the annual tally of UK firms being absorbed by private equity increased from 130 to 181.
This has removed dozens of listings from the London Stock Exchange and there has been a 40% drop in the number of firms listed in London over the last 15 years. Jobs move abroad and more purchasing decisions are made in the US.
In Britain, politicians often respond to questions about the private equity sector with eye-rolls. By contrast, campaigners in Washington DC, such as Senator Elizabeth Warren, have proposed laws to limit the damage it can do to American workers and communities. Warren was so incensed that she introduced a “Stop Wall Street Looting” Act saying, “Washington has looked the other way while private equity firms take over companies, load them with debt, strip them of their wealth, and walk away scot-free – leaving workers, consumers, and whole communities to pick up the pieces.”
Such criticism is backed up by research: a study by the universities of Harvard and Chicago showed that on average during the first two years of owning a company private equity managers had cut one in seven of the staff, reduced wages, and raised prices in a process financiers call “margin expansion”. Back in 2005 a senior German politician famously described such buyers as a “swarm of locusts”, and the private equity industry still tries to persuade politicians that it contributes to economic well-being. The European response has been far more robust and resistant than that of the British to the challenge of American private equity.
One of the defenders of private equity, the former chancellor Philip Hammond, says, “Many businesses struggle to prosper in public markets with their focus on quarterly earnings. They can operate a lot better in private markets: when you are owned by private equity your owners are all over you in trying to help you grow, and are typically not interested in dividends.” Others confirm the challenges of the conventional model of listed companies where managers can feel isolated, over-regulated and vulnerable to opportunistic takeovers.
This highlights an acute clash of cultures between Europe and America: should companies be out-and-out profit maximisers or should they be making a greater contribution to society and balancing the interests of their different stakeholders?
Economies are always in flux and private equity profits from this constant re-organisation: whenever there is a crisis, private equity shows up. The Great Financial Crash in 2008/9 produced opportunities for the next few years but Brexit and Covid have also given private equity the chance to swoop in and buy “distressed assets”: in reality, it is buying hard assets with distressed owners. It is said in hospitals that a bad day for the patient is a good day for the medical student. Similarly, a bad year for the economy is often a good year for private equity.
As the pandemic swept across Britain in 2020-22, people feared for the most vulnerable in their families and communities so homes and workplaces were locked down. But for private equity it was quite different: precisely because the consequences of Covid weakened many listed companies it created buying opportunities. In the early months of the crisis private equity firms announced approaches to three times as many companies as they had ever done previously.
Stephen Schwarzman’s Blackstone Group was one of the more aggressive buyers during the pandemic, picking up housebuilder St. Modwen, aviation supplier Signature, and Bourne Leisure. Bourne owns Butlins, Haven and Warner Holidays and was a typical private equity deal – some of the founders wanted to retire, the business was suffering from the effects of the pandemic and it was packed with property assets which the buyer could borrow against. As a domestic holiday operator, it also stood ready to profit from the staycation boom.
KKR, Apollo, Carlyle, Advent and Bain each bought businesses in the hospitality, retail and travel sectors. Low valuations prompted the takeovers of infrastructure group John Laing (KKR), defence contractor Ultra (Advent), waste company Viridor (KKR), and housing developer Beechcroft (Carlyle).
Large companies were equally vulnerable – a bidding war broke out for Morrisons supermarkets, and each of the two American private equity buyers understood what a bargain it was even at £7 billion, apparently selling for less than the value of its freehold property. By August 2021, Reuters was reporting “UK for sale”.
Blackstone has been devastatingly effective in taking over British companies. Usually it buys cheaply, cuts costs, and often raises prices to earn fabulous returns.
Right from the outset, Blackstone’s founder Stephen Schwarzman wanted more than just a few profitable deals. His ambition was far greater: to build a financial juggernaut that would buy and sell whole businesses and, when profitable, keep hold of them for the longer term.
The machine he envisaged would be opportunistic, constantly sifting through the economies of the world to find hidden value that he could capture. He says, “to be successful you have to put yourself in situations and places you have no right being in…through sheer will, you wear the world down, and it gives you what you want.”
Including the staff at acquired companies, Blackstone now employs around 750,000 people. It controls over 200 large enterprises and within that collection the UK offered a rich seam of bargains: listed companies, government assets, and family firms. This single private equity firm has had a hand in the purchase and sale of scores of UK enterprises including Legoland, the NEC in Birmingham (the UK’s largest event space), Madame Tussauds, and Blackpool Tower. As Schwarzman says, “Some people in finance touch enormous parts of the economy.”
These buyout companies are all constantly scanning the UK economy for attractive assets. Private equity interests already own hundreds of UK and US businesses and in the process, their founders have become influential and immensely wealthy.
Apollo’s Leon Black and KKR’s Henry Kravis, both based in New York, have each made over $8 billion. In Washington, David Rubenstein’s Carlyle Group has earned him over $3 billion personally and in Chicago Orlando Bravo has amassed a fortune of $8 billion through the Thoma Bravo company. At Blackstone, Schwarzman’s personal wealth is said to be almost $40 billion.
If the price of an acquisition is too high for a single private equity buyer they will team up with others, as happened with the UK’s only satellite supplier, Inmarsat. In order to pay the $3.4 billion required, Warburg Pincus of New York joined forces with Apax of London.
Within three years they had agreed to re-sell the company to California’s Viasat, for almost twice their purchase price. Apax did a similarly lucrative deal when it bought Autotrader from the Guardian and sold it on to Cox Group, a conglomerate from Atlanta, Georgia.
Private equity groups cooperate easily because they have a shared culture which also allows individuals to move freely between the companies. The culture is mostly American, sparky and uses a lot of shared jargon such as unlocking value, sweating the assets, value add, levering-up and tax planning.
Tax is always minimised, significantly boosting returns, and their advisors don’t just know how the tax inspectors operate, they often know the individuals themselves. For many purchases, reducing tax is a big element in making a target attractive – companies are worth much more to owners after a restructuring has virtually eliminated the tax bills.
Increasingly private equity investors have been willing to put up ‘permanent capital’ removing the pressure to re-sell the business, and investment money has been drawn in by the high returns. At the start of 2024, it was estimated that private equity groups had over $2.6 trillion of cash available for acquisitions, or “dry powder” as the industry calls it, taking a term from the lexicon of pirates.
Private equity is eager to take advantage of technology especially where it disrupts markets and creates new royalty streams. Zoopla was a home-grown disruptor in the UK estate agency market offering “Free value estimates on over 26 million homes”.
In due course, California’s Silverlake private equity group spotted Zoopla and bought it. A high proportion of UK property owners now look up the value of their home, and maybe sell it, through Menlo Park in California.
Buyers such as Silverlake seek out and digest their targets systematically. Whilst other predators might look for a single takeover, a US private equity company is itself a machine for takeovers. They are pursuing the highest returns possible, whether that means disposing of parts, selling the whole business or holding on and investing in it – and for this they have built teams of experts rather than relying on just one or two senior executives.
Private equity giants Blackstone, KKR, Carlyle and Apollo have each developed an entrepreneurial culture – rather than creating a single profitable deal, they create an environment in which profitable deals become almost inevitable. In parallel with the honing of these takeover machines, the public have stopped regarding takeovers as newsworthy, as shown by the response to Apollo’s purchase of 400 restaurants in October 2023. There was barely a grumble as a business with £900 million of turnover was turned over to new American owners.
After this banquet of takeovers, many of the remaining British-owned companies look either indigestible or unappetising and they often have poor economic prospects. Even though there are still some profitable family-owned companies, including digger-maker JCB or energy supplier Ecotricity, many remaining companies have large legacy liabilities and poor growth prospects such as BT, Shell and BP.
A group of smart, well-financed, highly motivated buyers, mostly American, has thoroughly picked over anything that offered good returns. Some UK sectors, such as utilities, have a degree of protection but private equity is already circling the UK banks and insurance companies as well as pharma and engineering.
Whenever management falters or the market fails to recognise value, private equity will move in. Usually, the buyer is from the US.
Ultimately, private equity has changed the way business works in Britain. Companies that remain in British ownership are forced to rein back non-financial objectives. They must now think carefully about spending which is not directed towards maximising returns, or else they become more vulnerable to a private equity buyout.
Private equity is only one element of the new wave of American control. There has also been a surge in the power of traditional US multinationals such as Coca-Cola, Exxon and Procter & Gamble.
And this growth has been in parallel with the recent rise of Big US Tech companies which have become utterly dominant in the online world. According to Internal Revenue Service figures, there are now over 1,200 US multinationals operating in the UK and their combined sales are huge – equivalent to about £20,000 for each UK household.
US private equity has, along with other US corporations, bought up the economic bridges of the British economy. In medieval Europe, those who controlled the bridges and rivers were able to extract an economic toll. So it is with US corporations – British consumers doing business between themselves will pay Californian companies for the privilege: you might rent a cottage in Scotland or Wales through Airbnb, sell your second-hand goods through Ebay or arrange a date through Tinder. And you will probably pay for these services through Visa, Apple or Google – all are also based in California.
A private equity takeover: the case of Morrisons
Morrisons was a big, profitable, 125-year-old company rooted in communities. It had 500 shops with about 100,000 staff. Morrisons grew and sold food.
In 2021 Morrisons was taken over by US private equity firm Clayton, Dubilier and Rice (CDR) for £7 billion (less than the value of its property and plant). £95 million was spent on advisors in connection with the acquisition.
CDR is based in New York, the centre of the private equity industry.
Between 2022 and 2023, staff numbers were cut by 8,854, and capital expenditure dropped by £100m.
Tax payments have disappeared: in 2020, Morrisons paid £87 million in tax; in 2021 £69 million; in 2022 (after the takeover) £7 million; and 2023 £0.
The company now produces shorter annual accounts, making it harder to work out what is happening, with several different companies now involved. This is complicated by the January 2024 sale of the 337 Morrisons petrol stations to another subsidiary of the US owner, Clayton, Dubilier and Rice.
After 2021 there were no more AGMs for public shareholders, no institutional shareholders with ethical objectives. The owners are now based in another continent.
Staff service awards have been reduced and staff have to pay higher pension contributions. Unite the union says that the company is cutting its pension contributions from 5% to 3% and that employees must increase theirs from 3% to 5%.
The pension surplus dropped by £140 million between 2022 and 2023.
Meanwhile the company’s debt burden has been increased from £3 billion to £7 billion, and the freeholds are being sold to finance the purchase cost, creating a permanently higher cost base.
In March 2024 The Grocer trade magazine said, “Morrisons has suffered from rampant out-of-stocks, haphazard listings and incoherent promotions.” Morrisons has now lost its position as the 4th largest supermarket group to Aldi, the German chain.
Vassal State – How America Runs Britain by Angus Hanton is published by Swift Press