You might think that the organisations best suited to looking after the people and things dearest to us – our youngest and oldest family members or our pets, for example, or, to take a rather different example, the water that is essential to life itself – would be mutuals, B Corps or even charities. Chance would be a fine thing. In fact, it’s precisely their users’ preciousness and linked vulnerability, translating into guaranteed demand for the organisations’ services, that ensure that the latter too often perversely end up in the hands of predators and ghouls that care about them least and exploit them most most rigorously.

Yes, we’re back with private equity, now almost constantly in the news, and mostly for all the wrong reasons.

Take water. When Margaret Thatcher privatised the regional water companies in 1991 she and her ministers hailed a coup: offloading a boring, predictable utility for the private sector to turn into a boring, predictable investment for widows and orphans. As parting gift, the government left the sector debt-free, taking on £25bn (£50bn plus in today’s money) of companies’ borrowings. But in the following years it was investors who celebrated. With PE in the lead, the companies used the steady income stream to ramp up leverage and engineer opaque and convoluted corporate structures that have invited comparisons with the banks in the run-up to 2008’s Great Financial Crash in 2008. 

Since privatisation, the water companies have invested £190bn. At the same time, they have also shelled out £78bn in dividends to shareholders and piled up £64bn of debt, leaving some of them, particularly Thames Water, supplier to a quarter of the UK population, in crisis as the fat years come to an end. Thames’ parent company is in default – an ‘uninvestable’ company that needs to raise £3bn in equity for a new five-year plan to fix chronic leaks and sewage spills. Labouring under £18.3bn of debt and a tidal wave of criticism, Thames now faces soaring financing, construction and penalty costs, while customers are looking at a possible 40 per cent price increase over the next few years, depending on the outcome of the current cat-and-mouse game with a newly-awakened regulator. Some observers fear a domino effect, with contagion (the right word) from Thames causing the collapse of the whole industry, including the hopeless regulatory framework that is an integral part of the debacle. Let’s hope there aren’t too many orphan and widow investors left to suffer a 40 per cent ‘haircut’, as it is euphemistically called, to their holdings if water goes under.

Then there’s pets. When the Competition and Markets Authority asked the UK public for their concerns about the £2bn veterinary industry at the end of 2023, a record 56,000 people responded, prompting a formal investigation of possible market abuses. These are many.

Pets are part of the family, and owners don’t skimp on their treatment. Since the pandemic pet ownership is on the rise, while the vets who treat them have typically been independent, local one- or two-person bands. That makes them the fluffiest of targets for PE, always on the lookout for fragmented businesses with guaranteed demand, which has been quietly but steadily picking them off: a decade ago 90 per cent of vets were independent, a figure that has now fallen to 40 per cent. The other 60 per cent are in the hands of six big corporates, three of them with PE involvement. This is the classic PE ‘roll-up’ – as in: PE buys up vet practice – easy to persuade an aging owner with a wad of money – then drives staff costs down and treatment costs up. Demand doesn’t waver (we all love our pets), and local branding is usually retained to disguise the change of ownership and ownership of other practices – as well as of related services such as pharmacies and crematoria, and in the case of Mars, one of the big vet owners, pet-food manufacturing too. Each of those, of course, follows the same maximising business model as the bought-out vets. Few vet websites list treatment prices, making comparisons hard. But unsurprisingly complaints of eye-watering price increases figured large in the CMA consultation, and Which? wants the Authority to take a close look at incentive pressures to over-treat.

For many of the same reasons – guaranteed demand, vulnerable consumers, a seller’s market – private equity firms have needed no encouragement to pounce on children’s homes, which local councils with the nod of government have largely outsourced to the private sector over the last decade, in the same way. Eight of the 10 biggest UK providers involve private equity – and, sure enough, as in the case of vets, there are persistent complaints of profiteering and over-specification, as well as distressing stories of short-staffing, poor care and maltreatment of vulnerable youngsters – again not a surprise given the incentives and nature of the business model. A critical CMA report in 2022 concluded that England had ‘sleepwalked into a dysfunctional children’s social care market’, now worth £6.5bn, where councils were paying excessive fees for inadequate or unsuitable services, and where ‘surprisingly low’ wages and training levels were a barrier to proper staffing despite profitability that was ‘unexpectedly high.’ It also worried about the firms’ risky levels of leverage. It wanted an overhaul of the entire system. Wales and Scotland are moving towards non-profit solutions, England not.

Can we ever trust PE with such precious cargos? There are small recent signs that the leopard is trying to change its spots, or at least their colour. Over the years some of the biggest PE houses have cheekily gone public, partly perhaps to provide a layer of relative transparency over a sector whose USP is that it is, well, private. And voices are now being heard among investors and industry insiders acknowledging a need for PE to be seen to be doing something to benefit employees of portfolio firms as well as investor-partners. There have even been suggestions that it should sign up to ESG goals – which seems surreal, a bit like inviting the wolf to self-identify as Little Red Riding Hood. 

Yet as reader Gordon Pearson noted under my previous PE piece, whether the business in question is water, treating sick animals or looking after children, the underlying lure of PE remains as brutally simple as it ever was: post acquisition, he was told by the multimillionaire CEO of Barclay Securities, ‘“the theory of what we are doing is to release half the cash, half the assets and half the people employed”. Use of the word release implied all such resources would be applied to more worthwhile activities. The truth was they would be either pocketed by the new shareholder or simply made redundant.’ 

Anyone thinking that is an exaggeration should consider this: according to FT calculations, 30 top executives in the big publicly-quoted PE groups saw the value of their shares soar by $40bn last year – quite apart from the similar amounts they were making on the ‘carry’ from their buyout deals. For the UK, the Treasury calculates the carry shared by some 3000 PE dealmakers at £6bn over the last two years. 

So no, private equity can’t be trusted to do the right thing for anyone except itself. The financial gains to anyone else are moot. Like the Norwegian sovereign wealth fund, neither our public sector nor our asset managers should contribute a penny more to these billionaire foctories’ ill-gotten gains.