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The private equity bandwagon in Britain keeps rolling. Latest to be imperilled is gaming group Keywords Studios, creator of Fortnite and League of Legends, which is being bought by Swedish buyout firm EQT for £2.2billion.
The highly leveraged deal for Royal Mail owner International Distribution Services is, to all intents and purposes, a private equity deal except the buyers are the Czech billionaire Daniel Kretinisky and Slovak investment banking partners J&T.
There are reasons to object to both deals. New ownership at Keywords may allow it to tap into new capital, which British asset managers are slow to supply.
However, the ultimate goal of private equity is to sell off prey as soon as possible and cash out.
No one knows where ownership and the intellectual property will end up. The financing model for the Royal Mail buyout is destabilising and the transaction cannot be in the public interest.
London calling: The UK is a magnet for private equity firms. Some of the biggest in the world, including CVC, Permira, Cinven and Apax, have their largest offices in the UK
Private equity has a mixed record in the UK. Some buyouts – Debenhams, Southern Cross care homes and, latterly, Asda spring to mind – have been destructive of the underlying enterprises.
Others, such as Pets at Home, Worldpay and Formula 1 are a resounding success.
As far as Britain’s financial sector is concerned, private equity is a roaring success.
Not surprisingly, Labour sees the wealth it generates as a potential source of revenue to fund bigger government.
It is aggravating to see private equity barons accumulating huge wealth and benefiting from a quirk in the tax system.
When businesses are sold, the proprietors benefit from ‘carried interest’ – the profit generated on disposals.
These gains have a top rate of capital gains tax of 24 per cent, way below the 45 per cent for additional rate income tax payers.
The UK is a magnet for private equity firms. Some of the biggest in the world, including CVC, Permira, Cinven and Apax, have their largest offices in the UK.
American groups including the original ‘Barbarians at the Gate’ KKR have chosen London as their European and global HQ.
Low equity valuations in London have made the UK a happy hunting ground.
The number of private equity partners in receipt of ‘carried interest’ is about 2,550 a year, says law firm Macfarlanes.
But the importance of the industry to financial and business services is enormous. Much of the bank financing for deals is done through the London branches of overseas and British banks.
Big American law firms have set up shop here – some absorbing ‘magic circle’ firms. In addition there are dealmakers from investment banks and boutique firms who propose bids and reap huge fees.
There is also an army of other advisers, from PR gurus to accounting firms and consultants, who feed off the structure.
The City has survived and prospered since Brexit because it has the scale that doesn’t exist in other European markets.
One may not like the deals but driving the firms offshore to Italy, or elsewhere, through ill-targeted taxes, would be a profound mistake.
Body building
Activists, too, can be a force for good. Arguably they made a difference at Aviva, GSK and Unilever, forcing the pace of change rather than the direction.
Smith & Nephew may receive less attention than big pharma, but it is a vital part of UK health care.
Establishing leadership stability has been a problem with the board and shareholders in a perennial battle over executive pay.
In chairman Rupert Soames, it has a big beast at the helm.
He should be capable of fending off any effort by Swedish activist Cevian to persuade it to abandon its UK home since 1856 and head to New York.
Pay rebuff
One reason executives find Wall Street alluring is to escape pesky governance mavens and ceilings on pay.
But it is not entirely a free-for-all.
This week Marc Benioff, boss of £200billion San Francisco-based Salesforce, received a bloody nose when investors voted against his £35million pay deal.
The streets of America are not always paved with gold.
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