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Private equity rules

It happens every couple of years. An eruption of dismay over foreign takeovers of prized British companies. Prized is the wrong word – often it’s because they are not prized that they become prey. But they are usually treasured (Boots or Cadbury’s), significant (water companies, airport owners and power providers), a source of pride (ARM Holdings) or of importance to national security – for example, Ultra Electronics, now potentially a target for defence group Cobham, itself the subject of a highly controversial takeover by US private equity firm Advent International in 2019.

While it’s harder to get worked up about a 500-store and freehold property-owning supermarket chain, no doubt the fear factor around private equity is making this an unnerving time for many of Morrisons' employees, and for its suppliers who may be apprehensive about a more aggressive approach to the prices they are paid.

Private equity hunters, descending it seems in droves now they can smell the odour of undervaluation, have a terrible reputation for asset stripping and loading up their purchases with debt for the next owner to sort out. Somehow even though private equity is playing by the rules, what the public see is plucky little companies unfairly pitted against stony-hearted predators who turn up armed with their lethal weapon of highly leveraged debt.

As wrong as that may be, it could be argued that recent deals (which include John Laing’s surrender to KKR, one of the biggest PE beasts of them all, Vectura and G4S, while aircraft parts maker Senior could soon be joining them) makes the London market even more skewed to old oil majors and banks. But perhaps the debut of payments firm Wise this week with its weighty valuation of £8bn will help ease such worries.  

In any case private equity isn’t all Gordon Gekko. A friend who works for a private equity owned pre-IPO business believes the pressure to deliver results makes her employer stronger and more resilient. Big decisions are made quickly, she says, and help the company move forward with renewed focus.

Any company listing on the stock market, risks being taken over. And while the new National Security and Investment Act means some deals might be blocked or have conditions attached, it seems unlikely this will make any difference apart from in rare cases because of the damage it could to do to inward investment. So for all the noises the government made about protecting Cobham post sale, it couldn’t stop Advent from selling off key divisions including the air to air refuelling technology one for which Cobham was famous. How could it have done? Shareholders don't have to sell out either – as AstraZeneca’s chose not to when Pfizer tried to buy it for £69bn (AZN’s market cap today is £114bn).

If a company isn’t valued by its owners and its board cannot persuade investors of its true worth with a strategic plan, then why shouldn’t private equity move in to extract the value that it can see? This is what private equity activist Cevian Capital is doing at CRH, as Nilushi Karunaratne explains, and the options stretch to relisting in the US.

Activists keep businesses on their toes. It’s no different to investment trust boards sacking managers for underperformance as Algy Hall outlined in our cover feature last week, pension funds being held to account by their members or the FCA getting riled up, as it did this week, about funds overcharging and underperforming. Does that make them all plunderers or protectors?