Over-leveraged, over-ambitious and over here. The American private equity firms who stormed into the UK to buy up a range of British companies from pubs to retailers have left behind a mountain of corporate debt that threatens to trigger a second credit crunch, which in turn will leave hundreds of thousands of people out of work.
According to a book published this week, half of all private equity-owned companies on both sides of the Atlantic are likely to collapse between now and 2015. It could lead to nearly two million people losing their jobs in the United States and perhaps 300,000 in the UK.
The core of the problem is debt. Private equity firms, both United States-based and home-grown, often snapped up their targets by putting up a minority of the purchase price and funding the balance with debt. Rather than assume the debt, they saddled their new subsidiaries with the liabilities. The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis warns that ten years of private equity deals generated more than $1 trillion (£607 billion) in new debt, the balance of which will come due just when these businesses are least likely to be able to pay it off.
Despite its title, Josh Kosman, the book’s author, says that the threat is as great — if not greater — in Britain as it is in the US. “The market became so saturated that, unfortunately, I think the effects there could be worse than in the US,” he told The Times. “In the UK the impact is going to be huge; indeed, it is already becoming a problem.”
This month Linpac, a Birmingham-based maker of plastic packaging for McDonald’s and Tesco, became the latest private equity-owned company to hit the buffers. Montagu Private Equity, which acquired Linpac in an £860 million deal six years ago, saw its equity wiped out under a takeover by a consortium of lenders.
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Mr Kosman said that American private equity firms had “rushed” to invest both in British companies and to “pump money” into British private equity funds. “It is awesome that England is so open, but if I was in England I would be pretty upset because you had Americans coming in and buying up your companies ... It was basically the Americans, whether pension funds or the firms directly, profiting from squeezing your businesses. And now you are left paying the bill.”
He contrasted this with what happened in Italy. “Heads of companies very publicly said: ‘I would never sell my company to a private equity firm.’ They are looking pretty smart right now.”
Mr Kosman highlighted a particular trend of private equity firms buying and selling companies to each other. “A lot of the deals in England in the last few years before the recession were buyout firms buying and selling to each other, which means that firms were squeezed once, twice, maybe even three times. So there is not a lot left to save,” he said.
“If a private equity firm can show me that ‘we cut costs, including jobs, but we improved the business and look how much better it is seven years from now’, I would shut up.
“But, by and large, that is not what you find. The great majority of the time the company is hurt in the long run. That’s why I am so critical because it hurts the company, not just the workers.”
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Mr Kosman’s argument is not without its critics. The British Venture Capital Association, which represents 450 private equity firms and advisers, believes that the author’s analysis is flawed. “There have been plenty of success stories,” Nathan Williams, its spokesman, said. “The reason private equity has been able to raise billions of pounds and grow so quickly as an industry is because of its success in generating returns for investors, such as pension funds.”
Mr Williams said that private equity-owned firms would cut jobs just as other companies had downsized in the face of recession, but he dismissed claims of mass layoffs “Where companies are struggling, there is a determined effort on the part of lenders and banks to do whatever they can to minimise job losses and make sure the company continues as a going concern and it is well placed for the upturn when it comes,” he said.
He pointed to examples of private equity firms buying companies out of administration. KPS Capital Partners bought Waterford Wedgwood, the pottery and china company, from administration in July, saving about 300 jobs. “That is the flip side,” Mr Williams said.
But if Mr Kosman is right, what can Britain do about it? “I think it’s pretty hard, as I think much of the cast is set both in America and in England,” he said. “Some of the fallout is unpreventable. Your Government is not going to step in to bail out most of these companies because there is not the political will and it would be very costly. Unfortunately, it is a huge hit.”
? The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis is published on November 12 (Portfolio, £19.99)