\u2018Fat cat\u2019 wealth transfer thriving in huge investor deals buoyed by cheap debt and lockdowns, say analysts<\/p>\n
Last modified on Thu 22 Jul 2021 16.00 EDT<\/p>\n
Welcome to the world of private equity, also known as the \u201cbillionaire factory\u201d, where already super-rich firms have used low interest rates and their considerable financial firepower to embark on a multi-billion dollar buying spree this year. <\/p>\n
Mere mortals were this week given a rare glimpse inside the money-spinning and highly secretive private equity industry \u2013 which buys up companies, often using more debt than stockmarket investors would tolerate, then floats or sells them on again \u2013 as the London firm Bridgepoint floated on the stock market.<\/p>\n<\/p>\n
The float left 166 of Bridgepoint\u2019s employees sitting on a combined \u00a32.5bn windfall. The firm\u2019s executive chairman, William Jackson, sold \u00a37.8m worth of shares, and hung on to a stake worth about \u00a342m. Fr\u00e9d\u00e9ric Pescatori, Bridgepoint\u2019s head in France and southern Europe, cashed in about \u00a316.5m and still had shares worth almost \u00a385m. The finance chief, Adam Jones, sold \u00a34m worth but retained shares worth \u00a322.8m, following the stock\u2019s 29% surge on its debut on Wednesday.<\/p>\n
Bridgepoint also extended its largesse to well-known City figures persuaded to join the board. Archie Norman, chairman of Marks & Spencer, received a \u00a31.75m fee to become senior independent director (on top of his annual \u00a3200,000 fee for serving on the board). Three other non-execs, including Carolyn McCall, chief executive of ITV, were also handed \u00a3500,000 for joining the board.<\/p>\n
Prem Sikka, emeritus professor of accounting at the University of Essex, and peer, said: \u201cFat cats. The chairman of Marks & Spencer, Archie Norman, has received a fee of \u00a31.75m to join the board of private equity firm Bridgepoint. Time to limit tax relief on fat cat pay.\u201d<\/p>\n
Lord Sikka said private equity firms had \u201cdevoured Debenhams, Maplins, Toys R Us, Bernard Matthews, care homes and much more\u201d, adding that high leverage and aggressive tax planning were the industry\u2019s prime tools. <\/p>\n
Bridgepoint \u2013 which is most famous for previously owning Pret A Manger and is now the owner of Burger King UK and the arts and crafts supplier Hobbycraft, and has a minority stake in the food chain Itsu among its \u00a323bn of assets under management \u2013 is just one of dozens of private equity firms across the world reporting record-breaking returns as cheap debt and lockdowns, which have forced many companies to seek investment, have created the perfect conditions for deals.<\/p>\n
\u201cThe great lockdown crisis toppled many industry forecasts and trends whilst reinforcing and accelerating others, including private equity, which arguably has never seen a more favourable environment for deal making,\u201d said Dominick Mondesir, a senior European private capital analyst at the private equity research firm Pitchbook. \u201cDeal activity has propelled to unseen levels, due to a combination of strong leveraged lending markets and an accelerating European economic recovery powered by the rising vaccination rate.\u201d<\/p>\n
Private equity firms have struck a record 6,298 deals worth $513bn (\u00a3373bn) so far this year \u2013 the most since records began in 1980, according figures from the data provider Refinitiv.<\/p>\n
The UK has been a particularly fertile hunting ground for US-based private equity firms, as companies in the country have been seen as cheaply valued due to the fall in the value of the pound since the Brexit vote.<\/p>\n
The supermarket Morrisons, infrastructure firm John Laing, industrial property developer St Modwen, UDG Healthcare, and the fund manager Sanne, have all received private equity offers in recent months. <\/p>\n
So far this year, PE firms have announced 124 deals for UK companies (both takeovers and minority stakes) with a combined value of \u00a341.5bn, according to the data company Dealogic.<\/p>\n
The American company Blackstone on Thursday reported a near-doubling of second-quarter distributable earnings to $1.1bn, sending its shares up 4.5%, gaining a record high market value of $131bn.<\/p>\n
Jonathan Gray, Blackstone\u2019s multi-billionaire president and chief operating officer, said: \u201cWhen we look in the second quarter, in our private-equity portfolio, 98% of our companies had revenue increases. Across 2,000 borrowers in our credit area we had one default.\u201d<\/p>\n
Luke Hildyard, director of the High Pay Centre, which campaigns for executive pay restraint, said: \u201cThere are many examples of private equity firms doing very well from recent economic developments, but it\u2019s important to ask whether society as a whole will benefit from this bonanza.\u201d<\/p>\n
Ludovic Phalippou, a professor of financial economics at Oxford University\u2019s Sa\u00efd business school, sparked outrage among the industry by publishing an academic paper accusing private equity chiefs of paying themselves vast management fees.<\/p>\n
In the paper, entitled An Inconvenient Fact: Private Equity Returns & The Billionaire Factory, Phalippou said private equity chiefs had paid themselves about $230bn in performance fees since 2006 despite on average achieving about the same return as a simple US stock market tracker.<\/p>\n
\u201cThis wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance,\u201d Phalippou said.<\/p>\n
He said the fees, which were ultimately paid by investors into private equity funds such as pensions, had helped turn 19 more private equity bosses into billionaires since 2005, taking the total number of private equity chiefs with nine zero fortunes to 22. <\/p>\n
\u201cThe private equity industry may need to rethink its business model, lowering costs and reconsidering how performance fees are paid in order to remain sustainable. This, however, will probably generate fewer billionaires,\u201d Phalippou noted.<\/p>\n