Fury over plan for 'taxpayer handouts' to rescue troubled high street brands including Pizza Express

Ministers sparked fury today as they examined ways to bail out businesses owned by private equity firms to save thousands of high street jobs.

The Treasury is looking into ways of getting money into the companies behind a raft of high street names seen to be at risk of collapse.

Private equity outfits often load their businesses with high levels of debt in relation to their income, as a way of paying less tax and maximising returns for investors.

It means that while they are making money they run at a loss – but this makes them ineligible for loans under EU law blocking state aid for badly failing companies.

Among those that could be in line for handouts could be Pizza Express, Prezzo or Merlin Entertainment, which owns Madame Tussaud’s and Legoland among other businesses, according to the Financial Times.

All are struggling in a hospitality sector decimated by the coronavirus shutdown.

While private equity firms can sometimes take failing businesses and turn them around, their focus on short-term gains can often also leave businesses ill-prepared for long-term survival.

Recent examples include such High Street favourites as Toys ‘R’ Us and Debenhams.

Private equity firms have been known to hire former ministers and MPs in advisory roles – perhaps most notably Gordon Brown and George Osborne.

How Private equity firms – the ‘vampires’ and ‘locusts’ of capitalism – take over companies

Private equity firms have been described as the ‘vampires’ and ‘locusts’ of capitalism.

They operate outside the structure of the stock market, using private investor cash to buy into what are normally well-established firms and take control of them – if they are publicly listed they are taken private.

They do not run the company, instead appointing the management to operate it for them to a plan of their devising.

In the decade since the financial crisis private equity firms globally have build up a war chest of trillions of US dollars.

Their aim is to restructure firms in order to be able to sell them again at a profit.

And they have made billions for their investors. But at the same time, their efforts to cut costs to make a profit often focuses on cutting jobs and closing offices and factories.

While they can sometimes take failing businesses and turn them around, their focus on short-term gains can often also leave businesses ill-prepared for long-term survival.

They have also been criticised for leaving firms with a high amount of debt, because of the way they raise additional money for the takeover, using the firm’s assets as security.

Recent examples include such High Street favourites as Toys ‘R’ Us and Debenhams.

US giant Toys ‘R’ US filed for Chapter 11 bankruptcy protection in September 2017.

The company hoped to restructure some $5billion in debt, much of which stemmed from a $6.6billion leveraged buyout by private equity firms Bain Capital, KKR & Co and Vornado Realty Trust in 2005.

In 2018 its UK arm plunged into administration after failing to pay a £15million VAT bill.

Debenhams was bought by Texas Pacific Group, CVC and Merrill Lynch Private Equity in 2003 for a £600m equity investment.

They trebled their investment in three years after selling off freehold property and cutting costs.

But the acquisition left Debenhams with £1bn of debt and little room to improve its bottom-line performance during times of tougher trading conditions – and business has been tough since the financial crisis of 2008, plus greater internet competition.

In 2018 it announced annual losses of almost £500million, and closed 50 stores with the loss of 4,000 jobs

The firm is now considering liquidation. If the ailing department store chain collapses – and all 14,000 jobs are lost – it would be the single biggest cull of the coronavirus crisis.

Peter Morris, of Oxford University’s Saïd Business School, told the FT: ‘Policymakers have been rewarding excessive levels of debt across the board ever since the financial crisis, via quantitative easing.

‘But private equity firms and their supporters often talk about the virtues of the so-called ”discipline of debt”.

‘It seems hard to square that with accepting taxpayer handouts,’ he added.

Private equity firms have been described as the ‘vampires’ and ‘locusts’ of capitalism.

They target firms across a wide variety of sectors from retail and hospitality to manufacturing and services – even care homes.

They sometimes hire former ministers and MPs in advisory roles.

In 2019 ex-prime minister Gordon Brown became an advisor to Swiss private equity firm Partners Group, which controls $78billion of assets.

And George Osborne, the ex-chancellor, is a £650,000-per year adviser to US investment fund BlackRock, which was formerly part of private equity firm Blackstone.

Earlier this month Pizza Express today revealed it could shut 67 of its UK restaurants with up to 1,100 jobs at risk.

The 55-year-old company, owned by Chinese private equity firm Hony Capital, has debts of £735million and put itself up for sale after bringing in experts.

Bosses at the chain said they wanted to push down rents by closing about 15 per cent of its 449 restaurants in the UK, which would help protect 9,000 jobs.

Prezzo has been owned ultimately by TPG Capital, based in the United States, though a UK holding company since 2014. It was already in trouble before coronavirus and was put up for sale earlier this year.

Merlin Entertainment, which also owns Blackpool Tower and the Sealife Centre chain of aquariums, is jointly owned by Blackstone, another US-based private equity firm, and Danish company Kirkbi Invest.

A Treasury spokeswoman said: ‘We have set out an unprecedented package of support for businesses, including more than £50 billion in government-guaranteed loans, £10 billion in grants, flexibilities with tax bills, paying furloughed workers’ wages, and VAT deferrals.

‘Whilst recent changes to State Aid rules mean more small businesses can access the Coronavirus Business Interruption Loan Scheme, we recognise that some viable larger businesses may still be classed as undertakings in difficulty.

‘We are continuing to explore whether more can be done to support these businesses within the parameters of EU State Aid rules.’

Read more at DailyMail.co.uk

Fury over plan for ‘taxpayer handouts’ to rescue troubled high street brands including Pizza Express

How Private equity firms – the ‘vampires’ and ‘locusts’ of capitalism – take over companies