ALEX BRUMMER: The perils of private equity

The liability-driven investment (LDI) debacle, which threatened the nation’s pension funds, has rightly focused attention on the safety of the financial system. 

Most potential problems are thought to be hiding in the less-regulated nonbank sector, such as LDIs. But it shouldn’t be imagined that the High Street banks are as rock solid as enforcers would like us to believe. 

Former Lloyds chief executive Antonio Horta-Osorio boasted after the financial crisis that he had rendered the bank safe by displacing billions of sterling of short-term funding with safer long-term capital. 

‘The authorities are also concerned that private equity players in UK finance, which operate a highly-leveraged model, might be vulnerable to the sudden rise in both short and longer-term interest rates’

Yet we have now learned that at the height of gilts-LDI meltdown, when the Bank of England feared a cascade of insolvencies as a result of high leverage borrowings, Lloyds had high exposure – some £52bn – to the ‘repo’ (short-term secured loan) market. It is not just investment banks that play in the casino-like derivatives space. 

The authorities are also concerned that private equity players in UK finance, which operate a highly-leveraged model, might be vulnerable to the sudden rise in both short and longer-term interest rates. 

There have been some glimpses of stress with Clayton, Dubilier & Rice-owned supermarket Morrisons seeking asset disposals. 

A survey by mid-cap broker Numis suggests that in spite of the end of the low cost of borrowing, private equity, having denuded the lower reaches of the FTSE 100, is far from being out of the game. 

The poll of 200 senior private equity players suggests that the political turmoil has not shifted the dial, and the UK remains attractive. Some 73 per cent of private equity chiefs questioned are still interested in London-quoted firms. 

‘An amazing 92 per cent find London attractive because institutional investors are more inclined to sell at the right price and the regulatory environment is less onerous than elsewhere’

An amazing 92 per cent find London attractive because institutional investors are more inclined to sell at the right price and the regulatory environment is less onerous than elsewhere. 

No one can regard the private equity assault on Britain’s second tier engineering, aerospace and defence companies with anything but disquiet. 

It was a campaign by this paper which prevented the insurance and pensions mutual LV+ being swallowed by Bain. The Numis study does show that in spite of scepticism about the ability of Britain to finance the deficit on the current account, concerns about the country’s dependence on the ‘kindness of strangers’ are overdone. 

For better or worse, the UK remains an investment honey-pot. 

Pensions mayhem 

‘Trustees of pension funds have been so obsessed about closing funding gaps that they have been rendered susceptible to quicksilver schemes from pension advisers and investment bankers’

The disruption to the smooth operation of financial markets in the wake of the miniBudget is already being examined by the Treasury Select Committee. 

Consequences for Britain’s defined benefit pensions system potentially were far more catastrophic than those at the Mirror Group Pension fund, when it was plundered by Robert Maxwell, or at BHS, which became a cause celebre. 

The Commons work and pensions committee is rightly launching an investigation into the regulatory system that allowed LDI to erupt. The Bank of England was more than aware of the vulnerabilities as far back as 2018 and stress tested the system. It is not clear that the Pensions Regulator was up to the task of policing complex funds at the heart of the system. 

Trustees of pension funds have been so obsessed about closing funding gaps that they have been rendered susceptible to quicksilver schemes from pension advisers and investment bankers. The committee would be advised to call Next boss Lord Wolfson. 

He is one of the few FTSE 100 chiefs to have questioned the use of complex derivatives to maximise returns from ‘super-safe’ fixed interest holdings. With the retirement incomes of up to 10m UK pensioners at stake, the significance of the hearings cannot be under played. 

Shopping activist 

Mike Ashley may have surrendered formal management of his Frasers group to son-inlaw Michael Murray. But he cannot resist a bargain. The Debenhams experience, when he lost £180m on an equity investment, has not dulled his enthusiasm. 

His latest target is online retailer Asos, in which Frasers has declared a near 5 per cent stake while the share – some 78 per cent below its peaks – is on its knees. It also continues to build an interest in Germany’s emblematic designer clothier Hugo Boss in which it has a £840m stake. 

Together with its holdings in N Brown, Aussie retailer Mysale and much else, Frasers Group is building a new 21st-century retail conglomerate.

This post first appeared on Dailymail.co.uk