Systemic risk warnings are a failure

Finally, the Bank of England has started to look at the private equity industry and has found that in 2022 3,000 private equity bosses shared £5bn. The Bank started to research the area after the Labour party said it would tax those gains at a higher rate, at the moment they are treated as capital gains.

Funnily enough at the same time the Bank is warning that private equity investments may have to be carefully watched in case their collapse is an economic threat. What could possibly link those two stories do you think?

Could it be that private equity firms are making their owners millionaires by borrowing billions, buying perfectly viable companies loading them with the debt, asset stripping them and then selling them on?

There have even been many examples of the former bosses of firms leaving, setting up a private equity company, borrowing billions and then buying the company they used to be paid to run for the benefit of the shareholders and making themselves millionaires almost overnight.

It tells you pretty much all you need to know about the so called “private equity industry”.

The problem is not too great if it only happens occasionally but when swathes of different sectors are loaded down with debt and low profits it is a real problem. Now with higher interest rates some of the private equity funds themselves are in trouble.

Their cost of borrowing is soaring and the British economy is flatlining.

All of a sudden borrowing huge amounts to buy boring businesses is not looking so clever. But it would not have come to this if the authorities had clamped down on this years ago.

Far too many managers have spent years looking at their companies’ books and working out how to make themselves very very rich. They could have been banned from buying the company they used to run for years, or the sale of firms from private equity owners could have been the subject of stricter auditing rules or a truly independent valuation.

There have been too many examples of companies being sold to the easily fooled for the huge amounts. Often they end up as little more than Zombie firms, if they are lucky.

Warning about a systemic risk only means that the regulators have acted too late, they really ought to see this sort of thing coming.

But strangely they never do.

Meanwhile the individuals involved have walked off with billions perfectly legally, and left others to clean up their mess.

So nothing like the bankers in the credit crunch.

Jonty’s Jottings

Economics, trade and Brexit, not necessarily in that order but the dog always comes first.

By Jonty Bloom Media