How Private Equity Ate Britain

Summary

The video script uncovers the impact of private equity on the British High Street post-Brexit and during the Covid-19 pandemic. It details how companies like Morrisons, Burger King, and Pizza Express have been heavily leveraged, leading to financial strain and potential job losses. With interest rates rising, the debt-laden businesses face challenges in maintaining competitiveness, affecting millions of workers and suppliers. The script also touches on political concerns and the delicate balance between regulating private equity and attracting foreign investment.

Takeaways

• 🏪 Private equity investment in the UK has surged since Brexit, particularly in the high street sector, with companies like Burger King, New Look, and Pizza Express being acquired.
• 💰 The main strategy used by private equity firms is the leveraged buyout, where a company is purchased with a significant amount of borrowed money, often leading to high debt loads for the acquired company.
• 📉 Post-Brexit and the Covid-19 pandemic have led to a decrease in the valuation of British companies, making them attractive targets for private equity firms looking for bargains.
• 🛒 Morrisons, a major supermarket chain in the UK, was bought by the American private equity firm Clayton, Dubilier & Rice for £7 billion, highlighting the trend of private equity investment in the UK.
• 📈 The valuation of Morrisons compared to US retailers showed a significant drop post-pandemic, making it a prime target for private equity acquisition due to its lower price.
• 💹 The influx of private equity into the UK has been substantial, with nearly 200 billion dollars spent on British companies between 2016 and 2023, outpacing investment in other European countries like Germany and France.
• 📊 British companies have become cheaper compared to their American counterparts, with a British firm making a dollar of profit being valued at $11, compared to $20 for American firms.
• 📈 The increase in interest rates has made the debt taken on by companies like Morrisons more expensive, impacting their ability to compete on price with other supermarkets.
• 🛍️ The debt load has forced companies like Morrisons to sell assets to manage their financial obligations, which can affect their operations and offerings to consumers.
• 👥 Private equity-backed companies in the UK employ a significant portion of the workforce, with 1.9 million people directly employed and another 1.3 million employed by their suppliers.
• 🏛️ Politicians and regulatory bodies like the Bank of England are concerned about the impact of increased private equity ownership and debt on the British economy, but finding solutions is complicated by the need for external investment post-Brexit.

Q & A

What is the main issue discussed in the script regarding the British High Street?

The script discusses the issue of private equity investors controlling a significant number of high street stores, which poses a potential problem for the future of British high street businesses and the millions of people who work in them, due to the heavy reliance on debt.

What is a leveraged buyout and how does it relate to private equity?

A leveraged buyout is a method used by private equity firms to acquire companies by using a large amount of borrowed money to meet the cost of acquisition, typically in the form of bonds. This means the company itself is responsible for repaying the debt, not the buyer, which can be risky if the company goes bust.

How has the Brexit affected the valuation of British companies compared to American ones?

Post-Brexit, there was a lot of uncertainty in the UK economy, which was compounded by the effects of the Covid-19 pandemic. This led to British assets being valued far less than they were before, making them attractive for external buyers like American private equity firms.

What was the impact of the Covid-19 pandemic on Morrisons' valuation compared to US retailers?

The Covid-19 pandemic caused a dip in Morrisons' valuation, which did not recover as quickly as US retailers did with the post-pandemic spending bump. This made Morrisons a more attractive target for private equity investors.

Why did Clayton, Dubilier & Rice (CD&R) buy Morrisons and what was the purchase price?

CD&R, an American private equity firm, bought Morrisons for about 7 billion pounds in October 2021. The purchase was attractive due to Morrisons' lower valuation compared to US peers and the ease of borrowing money at low interest rates at the time.

How has the increase in interest rates affected Morrisons' financial situation?

The increase in interest rates has made the debt that Morrisons took on to finance its acquisition much more expensive. With around half of its debt being affected by the rate increase, the company now has to pay hundreds of millions of pounds more each year in interest payments.

What steps has Morrisons taken to deal with its debt load?

Morrisons has sold assets, including a deal worth 2.5 billion pounds for its petrol stations, to help manage its debt. The hope is that these asset sales will allow the company to offer lower prices to shoppers.

What is the significance of private equity ownership for the British economy and its workers?

Private equity-backed companies in the UK employ 1.9 million people, and their suppliers employ another 1.3 million. The success or failure of these deals can have a significant impact on jobs and the cost of goods for consumers.

What concerns does the Bank of England have regarding private equity ownership of British companies?

The Bank of England is concerned about the increased debt levels and the potential impact on the British economy due to private equity ownership. They are worried that if these companies go bust, it could have broader economic implications.

Why is it difficult for politicians to crack down on private equity firms?

After Brexit, Britain has been searching for external investment, and private equity firms bring much-needed capital into the UK economy. Politicians must tread carefully to avoid discouraging this investment, even if it comes with risks.

How might the upcoming general election influence the handling of private equity issues?

The upcoming general election could influence how the new government approaches private equity issues. If the Labor Party comes into power, they will have to balance the need for investment with the risks associated with private equity ownership and increased debt.