To ask Her Majesty’s Government what assessment they have made of the takeover of United Kingdom companies by private equity firms; and in particular, their effect on the economy.
My Lords, the UK’s merger regime recognises that investors play a major and positive role in the UK economy and that many UK sectors have benefited substantially from takeovers and mergers. On the few occasions that private equity-funded acquisitions have raised concerns, the Government have always carefully monitored developments and taken action when there were clear public interest grounds.
My Lords, the typical business model of private equity includes high leverage, financial engineering, tax abuse, pension dumping, job losses and asset stripping. This trail of destruction includes Silentnight, Bernard Matthews, Debenhams, Maplin, Cath Kidston, Toys “R” Us, Four Seasons and much more. When will the Government commission an independent inquiry into the impact of private equity’s destructive practices on all stakeholders?
The UK’s merger regime, which I remind the noble Lord was put in place by the last Labour Government, recognises that overseas investors play a major and positive role in the UK economy, and that many UK sectors have benefited substantially from takeovers and mergers. Such transactions can help to boost UK jobs, increase management efficiency and support businesses to grow on the world stage. We benefit from being an open and accessible economy.
My Lords, I am sure that the Minister is aware of the latest Bank of England financial stability summary, which specifically warns that the current level of debt-fuelled US equity takeovers poses a growing threat to the UK economy. Bearing that in mind, what assessment has he made of the US National Bureau of Economic Research’s academic study, which found that when private equity firms buy up public companies, employment shrinks 13% in two years after the acquisition, and the fact that that has prompted senior Democrats to introduce the Stop Wall Street Looting Act to prevent private equity funds forcing companies they purchase to take on new loans to extract dividends they could not otherwise afford? Does he appreciate the irony of the potential of that Act becoming law in the US?
My Lords, of course we look at all transactions closely and there are specific grounds to intervene, set out by the Government that the noble Lord was actually a member of, as I said. We recognise the need for greater accountability for large private companies, including those owned by private equity. We published plans to do just that in our proposals on restoring audit and governance.
My Lords, I am sure that the Minister is aware of the acronym ESG, which stands for environmental and social governance—an important way of making sure that businesses behave properly. But there are different reporting standards for listed companies and private equity companies. Will he ensure that all companies trading in this country report on a level playing field? Will he undertake to make sure that everybody affirms the same ESG standards?
As the noble Lord is aware, there are a multiplicity of different international standards, but we are of course introducing the transparency requirements on climate disclosures, as he knows. We have the audit reform proposals, which will extend the reporting requirements to many large private companies as well. We will publish our response to that consultation shortly.
My Lords, according to the financial market data company Refinitiv, private equity firms have made over 345 bids for British companies this year—the highest number since records began back in 1984. We need to ensure that new owners act responsibly, so does the Minister have confidence that the regulatory bodies have sufficient oversight and powers to intervene when private equity owners of British companies fail that duty? How can we build national economic resilience at home to promote global Britain abroad if companies are being bought up so easily and cheaply?
My Lords, we benefit in global terms from being an open and accessible economy. That brings in billions of pounds-worth of inward investment. My noble friend Lord Grimstone, who is in charge of the Office for Investment, works extremely hard to attract overseas investment. We must be very careful not to send out the message that we do not welcome inward investment into this country. That was something recognised by the previous Labour Government and certainly something recognised by this Government. Of course we keep these matters under review. We have introduced the National Security and Investment Act, which gives us additional powers to intervene on national security grounds, and we extended the grounds on which the Secretary of State can intervene under the Enterprise Act.
My Lords, some private equity companies are good managers of businesses, others rather less so. Does the Minister agree that, given the need of the Treasury to bring in extra cash, the treatment of carried interest—the favourable tax treatment of private equity operators—is no longer sustainable?
My Lords, I have never noticed any lack of interest from the Treasury in extending the tax base whenever it possibly can, but the current tax rules reflect the hybrid nature of this reward. If investment managers realise their carried interest gain within three years, that gain is treated as income and taxed accordingly. This approach is also followed by other comparable jurisdictions.
My Lords, does my noble friend agree that inward investment and an economy open for global business are good, but where a UK target company has been built largely and perhaps sometimes exclusively on taxpayer-funded government contracts, should we not reconsider the current regime?
It is difficult to give specific examples, but there are grounds under national security, financial stability, media plurality or public health emergencies for the Secretary of State to intervene in mergers and takeovers, and, of course, the CMA monitors competition grounds. Beyond those factors, we welcome inward investors and I agree with the noble Lord that we should be an open and accessible economy.
My Lords, everyone agrees that there is a benefit in investment, but we are not talking about long-term or even medium-term investors. We are talking about short-term profiteers. They are opaque, undertaxed and underregulated. Will the Minister sense the mood of this House and consider regulating in this area, not just on national security grounds but on human security and economic security grounds?