The resilience of private equity

Do not write-off private equity just yet.

There’s been a lot written about the current cov-lite crisis in the past few weeks, with the conclusion being that this spells the end for private equity firms.

Just to cut through the jargon, private equity firms and the funds that they run for their investors have found it incredibly simple to borrow the money they’ve needed to take firms private.

Cov-lite basically means that banks have lent them money without any real covenants, such as being fined for late repayments. It is akin to borrowing money without any assets or stringent conditions attached (see the sub-prime mortgage debacle in the States to which the cov-lite problems are indirectly related).

It’s been a great time for private equity with both this and the tax relief they have received since 2000 has meant that they have been charged a very generous 10% as opposed to 40%.

There’s no doubt that these two factors have helped put the companies very much in the spotlight, so their death – political pressure seems almost certain to put raise tax to at least 20% - will not be welcomed by private equity.

But, to think that they represent major problems for the industry is faintly absurd. In one form or another, private equity and its junior variation, venture capital, has been around for hundreds of years. The industry as we know it today has been with us since the early 70s. The results have been spectacular – typically, employment at the firms it buys out to increases by 11%, although there are usually redundancies in the first year.

Private equity has generally been good for British business. And the huge returns that they have generated – typically 30-35% added value when the bought firm is sold on - means that they are cash rich enough to be resilient through their current problems.

And that’s why private equity will still be looming large over potential targets in the construction and housebuilding sectors.