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The interest of private equity in UK firms is a good news story and shows optimism in our recoverySeptember 5, 2021
Across the UK 4,000 businesses are backed by private equity and venture capital and support a million jobs
It has been a while since Morrisons ditched its “More reasons to shop at Morrisons” slogan but the bids for the company from private equity firms Fortress, and Clayton Dubilier and Rice (CD&R) suggest the slogan is still as relevant for investors as it once was to customers.
There has been a flurry of M&A activity this year around the globe as developed economies have bounced back from the pandemic and UK companies have seen particular interest.
With Brexit done, stable government and consumer confidence re-emerging given the speed of the UK vaccination programme, it is unsurprising that investors around the world see Britain as open for business and an attractive place to invest.
Some politicians do not seem sure whether to welcome the interest from overseas private equity in particular but it is good news for a number of reasons.
First, it is good for the shareholders of the firms being bought. Morrisons’ shares are up by more than 50pc in the past two months, increasing the returns of all of our pension funds which own its shares. Even where bids are unsuccessful they can have a powerful effect on management to improve performance.
Second, private equity owners can take a longer-term view of success, giving them the opportunity to invest and grow firms away from the short-term demands of the listed markets. Quarterly and semi-annual reporting and growing disclosure obligations can be useful tools for shareholders but these, combined with dividend expectations can make listed companies overly short term.
Third, the foreign ownership of much of this interest is partly a feature of the increasing internationalisation of equity markets. 30 years ago only around 10pc of listed UK companies’ shares were owned by non-UK owners; now it is more than half. But British investors also own much more abroad. Your pension fund is now likely to own at least twice as much equity from overseas as it does in UK companies bringing diversification benefits to investors.
Private equity has had some great success in retail in the UK – look at Majestic Wine which Fortress rescued two years ago from potential closure and which is now performing strongly supporting over 1,000 jobs. CD&R has also had enormous success in UK retail having bought the discount chain B&M in 2012 and overseeing years of growth and thousands of new jobs.
Across the UK over 4,000 businesses are backed by private equity and venture capital firms and support around a million jobs. And although bids for large firms such as Morrisons get the headlines, around 90pc of the industry’s investment has been in small and medium-sized businesses in recent years, providing vital funding unavailable from other sources.
But we can create an even better financial ecosystem that helps to build a larger UK industry.
Earlier this month the Prime Minister and Chancellor challenged UK investors to invest more in longer term assets and the Financial Conduct Authority will soon launch a framework for a new vehicle for long-term investment, the Long Term Asset Fund. Making it easier for UK pension funds to co-invest alongside private equity would also bring benefits.
And the listed markets need to keep up. When there is a large valuation difference between listed and unlisted markets, it suggests the listing rules are too onerous. That is why the reforms recently proposed by Lord Hill which would bring UK rules more in line with the US market are so important. And it is why we need to be careful to maintain a balance between good disclosure and governance without overburdening listed companies with rules that do not benefit their shareholders.
Anyone who has started or grown a business will tell you how important the supply of capital is to their success. We should celebrate the contribution private equity makes to the availability of capital and energise our capital markets to drive post-pandemic economic growth.
David Sismey is director of the Campaign for Economic Growth and is a former managing director of Goldman Sachs.
This oped was originally published in The Telegraph on 15 August 2021.
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