The Private Equity Impact on British High Streets

Introduction

British High Streets are known for their charming, picturesque appeal but many of these stores are now controlled by private equity investors, not independent shopkeepers or big multinationals.
Since Brexit, private equity has rapidly bought into the UK market, taking over brands like Burger King, New Look, and Pizza Express.

Leveraged Buyout (LBO): Main tool used by private equity.
- Example: Buying a small shop for £500,000 using £100,000 of your own money and borrowing £400,000. After selling the shop for £800,000, you profit and the shop bears the borrowed amount.
- Large companies can be bought using this debt-heavy model, reducing risk for the private equity firm.

Morrisons, a former family-owned supermarket chain and part of the big four in the UK, saw its valuation drop compared to the US retailers post-Brexit and pandemic.
Private Equity firm Clayton, Dubilier & Rice (CD&R) acquired Morrisons for around £7 billion in October 2021.
Low interest rates at the time made borrowing conducive.

After Brexit, the UK became an attractive market for PE firms due to reduced valuations.
Between 2016 and 2023, PE firms spent nearly $200 billion on British companies compared to $81 billion in Germany and $36 billion in France.
Many well-known High Street brands, such as The Body Shop, Wagamamas, and Zizzi, are now controlled by private equity.
UK companies were generally valued less than their American counterparts.

Issue: Morrisons acquired with £6.6 billion debt. Rising interest rates increased debt servicing costs.
Competitive pressure: Cheaper retail chains like Aldi and Lidl, unaffected by such debt, overtook Morrisons.
Morrisons has had to sell assets, like its petrol stations, to manage debt.

Private equity-backed companies employ nearly 1.9 million people in the UK, with another 1.3 million employed through suppliers.
When PE deals fail, the real-world impacts include higher consumer prices and job losses.
Political and Economic Concerns: The Bank of England and politicians are wary of high debt levels in PE-owned firms affecting the broader economy.
Potential Solutions: Proposing higher taxes on PE deals is complicated due to current economic conditions and the need for foreign investment post-Brexit.

As the general election approaches, policymakers must be cautious. The Labour Party may need to balance the benefits of foreign investment against the potential harms caused by private equity ownership.

The influx of private equity in the post-Brexit UK has had significant impacts, both positive and negative, on the British high streets, economy, and employment.
The future of these investments and their regulation remains a key issue for policymakers.