Private Equity and the Buyout of British Businesses

Britain has long been at the heart of the world's financial markets, providing essential lending and investment services and access to prestigious exchanges that underpin modern business.

Recently, however, a trend has emerged: institutional investors, usually private equity (PE) firms or other investment groups, have been swooping in to acquire British companies, offering bid after bid for London‑listed businesses.

This article will discuss the reasons behind this trend and what it means for law firms in practice.

The Threefold Justification

This acquisition spree boils down to three essential factors.

The first is Brexit

Brexit has caused fluctuations in the value of the pound sterling, often leading to significant dips. International investors have capitalised on these dips by taking advantage of favourable exchange rates, making acquisitions in Britain cheaper compared with international markets.

The second is low interest rates

Because of the pandemic, central banks, led by the Federal Reserve, drove interest rates to historic lows. This was intended to reduce the risk of an economic downturn and support struggling businesses by making borrowing cheaper. A related consequence was that PE firms took on unprecedented levels of debt, using it to load more debt onto companies they already owned or to make new strategic acquisitions.

The third is the COVID‑19 pandemic

While the pandemic initially had catastrophic consequences for the global PE market due to volatility and uncertainty, deal value and volume have since bounced back dramatically. Many economic sectors remain under pressure, creating opportunities for PE firms to step in by restructuring debt, supporting management teams and providing additional funding to distressed companies. At the same time, share prices in affected sectors fell sharply, allowing PE firms to acquire companies at lower valuations. The uncertainty also left dealmakers sitting on large reserves of "dry powder", ready to deploy when opportunities arose.

Case Study: The Bid for Morrisons

These three factors are clear in the acquisition of Wm Morrison by three private investment groups led by SoftBank‑owned Fortress: Fortress, CPPIB (a Canadian pension fund), and a unit of Koch Industries. This offer followed Morrisons' rejection of an earlier bid from PE group Clayton, Dubilier & Rice. The deal is the largest of its kind since KKR bought out Boots in 2007, and reflects the toll Brexit and the pandemic have taken on Morrisons' share price.

Morrisons agreed to the deal after a £9.5 billion bid, comprising £6.3 billion in equity and £3.2 billion in net debt. The deal remains subject to shareholder approval.

Viewed alongside the wider context of corporate Britain, this deal leaves British directors and management caught between traditional fund managers and bullish dealmakers eager to deploy capital. Valuation concerns arise from the negative impacts of Brexit and the pandemic on share prices across multiple sectors, making it difficult to determine whether valuations are reflective. This could lead to undervaluations that fail to adequately compensate shareholders, arguably undermining good corporate governance and stewardship.

In Morrisons' case, the shift from public to private ownership raised concerns among fund managers, who fear that such transitions could affect pensions, employment stability and the long‑term wellbeing of companies that traditionally thrive under public ownership.

The Future: For Better or for Worse

Looking ahead, we can examine past trends. A notable example is Debenhams' collapse earlier this year. During its private equity ownership, the company was heavily leveraged, paid large dividends to owners, feeding short‑termism, and sold or leased its land and property interests. This trend in retail is dangerous in corporate collapse, as it leaves a "pension fund deficit", as Labour MP Darren Jones pointed out, forcing employees to bear the consequences.

More broadly, rising corporate debt poses risks as interest rates and inflation rise. This is particularly concerning because European PE deals often use debt of about six times a company's earnings, well above the standard for listed companies, according to Refinitiv.

Alternatively, economist John Kay suggests that if PE funds practise "the kind of private equity that's willing to stick with a business for 15 years and make a positive contribution to its growth and strategic development", rather than focusing on short‑term gains and large dividends, then private equity could support growth and be healthy for the UK economy.