RUTH SUNDERLAND: With Morrisons set to fall into the hands of US buyout barons, a new book argues most private equity is just a giant racket – I’m inclined to agree
- The outlook is darkening for leveraged deals
- The last full-on private equity frenzy in the UK back in the noughties was brought to a screeching halt by the financial crisis
- This risky Morrisons deal is taking place against a backdrop of shortages on the shelves and at the pumps plus the return of inflation
Barring a major upset at the shareholder vote this week, Morrisons will fall into the hands of US buyout barons from Clayton Dubilier & Rice.
Investors, who are awfully keen on social responsibility if it involves green energy, women’s health or LGBTQ and less so if it entails saying no to rapacious predators, will probably wave it through.
But the outlook is darkening for leveraged deals. The last time there was a full-on private equity frenzy in the UK was back in the noughties when a string of disastrous transactions were hatched, including the AA, Debenhams, EMI and Southern Cross.
Troubled times: The last full-on private equity frenzy in the UK back in the noughties was brought to a screeching halt by the financial crisis
That was brought to a screeching halt by the financial crisis. In retrospect, this Morrisons deal may be seen as the high-water mark of this wave of private equity hubris.
Interest rate rises are clearly coming. Whilst borrowing costs are unlikely to shoot up to high levels in a hurry, it’s the wrong direction of travel for private equity players with their penchant for leverage. This risky Morrisons deal is taking place against a backdrop of shortages on the shelves and at the pumps plus the return of inflation.
Can the new private equity masters navigate these challenges and deliver the requisite returns?
Customers, staff and taxpayers are being asked to take a lot on trust. As are the savers at mutual insurance company LV, whose boss Mark Hartigan wants to sell to US private equity firm Bain having disdained an offer from fellow mutual Royal London. LV has more than 1.2m savers, including 340,000 with profit policyholders, who are the owners of the business.
They entrusted their money – typically around £90,000 – to an institution founded in 1843. No doubt they believed their money was in a stable place for the long term.
Yet if the sale to Bain goes through, their collective treasure chest will pass into the hands of private equity, whose perspective is unashamedly short term.
Around half of the with-profits fund does not mature for more than a decade. Will Bain still be the owner by then, or will it have been sold on?
True, the other half of the fund will have run off within ten years. But even that is a lot longer than the three to five year window in which private equity typically seeks to sell. Savers’ interests are protected in theory by a five-person ‘with profits committee’ which is supposedly independent of LV and initially did not approve the proposed sale. Bain could not sell on the with-profits fund without their consent.
How independent is the committee really? You decide. Two members are non-executives on the LV board. All are paid by the insurer and can be fired by the chairman.
Hartigan hopes to stay as CEO and receive an equity interest which could prove much more lucrative than the £1.2m he was paid last year. Regulators should think hard before approving this deal, as should LV savers if it receives a green light.
No form of ownership is inherently bad. The clowns at the former mutual Co-op Bank were gold medallists at incompetence and greed. The private equity model is, however, risky and opaque, with rewards skewed towards partners and managers. It’s hard for bosses to be objective when, like Hartigan and the Morrisons executives in line for £39m, they can reap windfalls.
A more critical perspective comes in a new book, ‘The Myth of Private Equity’ by Jeffrey C Hooke, of the Johns Hopkins Carey Business School in the US, who argues most private equity is just a giant racket.
I’m inclined to agree.