All language subtitles for How Private Equity Ate Britain

Ah, the charming British High Street
or Main Street, if you're American,

with its cobbled streets,
picturesque pubs and cutesy bakeries.

But there's an uncomfortable truth
lurking behind the storefronts

Because a lot of these stores are not owned
by independent shop keepers or even

big multinationals.

Instead, they're controlled
by private equity investors.

In fact, private equity has flown into the UK

at an unprecedented rate since Brexit,
hoovering up scores of high street names

such as Burger King, New Look and Pizza Express.

This is a story about the Private Equity raid on

some of the best known high street companies in the UK

in the aftermath of both Brexit and the Covid-19 pandemic.

Now, as the UK
adjusts to new economic realities

the private equity boom
could pose a problem

for the future of the British high street

and the millions of people who work on it,
because most private equity is dependent

on one thing:

Debt.

Let’s start by unpacking how
private equity works, and in particular,

the main tool in the industry's
arsenal - the leveraged buyout.

Okay, so

imagine you want to buy a little shop
for, say, 500,000 pounds.

You use 100,000 of your own money
to pay for the deposit,

but you borrow the remaining 400,000

usually from a bank.

You spend another 50,000 pounds

sprucing the place up, then sell it
three years later for 800,000.

That covers your costs and whatever

you still owe the bank
and you pocket the difference as profit.

Now imagine that rather than you
being responsible for repaying the money

you borrowed.

The shop itself was responsible.

Not you, the shop.

You can walk off into the sunset
with all the proceeds of the sale.

The shop’s new owner now has
to find a way of repaying what you borrowed.

That is sort of
how leveraged buyouts work.

You buy a company and fund much of
the purchase price with debt or leverage,

often in the form of bonds.

So essentially you can buy a really massive company

and load it up with debt

to pay for your aquisition of that company.

And if the company goes bust,

you don't lose as much as if you paid
for the whole thing with cash.

Let’s get back to the UK

to understand what’s been going on here we’re going to

look at Morrisons.

For much of his existence

it was family owned and until recently
it was one of the big four supermarket chains.

One look and you’ll know,

our prices are low,

whenever you shop at Morrisons.

Look at this chart.

It shows how Morrison's

valuation compares to US retailers
as a multiple of their earnings.

That's just a way of comparing companies
on a like to like basis,

even if the firms aren't the same size.

And in the years immediately after Brexit,
the valuations were pretty comparable.

Until the pandemic came along.

Then look what happened.

The US retailers recovered
with the post-pandemic spending bump.

Morrisons did not.

Morrisons valuation was cheaper compared to U.S. peers

making it quite attractive for an external buyer..

So in 2021 we’re just coming out of Covid lockdown

and there is a bidding war for
Morissons between Private Equity firms.

The American firm
Clayton, Dubilier & Rice emerged victorious

paying about
7 billion pounds in October 2021.

Just a few months earlier

Morrisons had been valued
at 4.5 billion pounds.

But even that inflated
price seemed worthwhile because

low interest rates meant it
was easy to borrow a lot of money.

And Morrisons wasn't alone.

Private Equity piled into Britain
in a big way in the years after Brexit.

And outlook negative.

Post Brexit there was a lot of uncertainty in the UK economy.

I think that was compounded by the effects of Covid.

And suddenly these American Private Equity companies were looking at British assets that were valued

far less than they were just a few months ago.

Between 2016 and 2023 Private Equity companies
spent nearly 200 billion dollars

buying British companies.

That compares to about 81 billion dollars
in Germany and 36 billion dollars in France.

Essentially you walk down any UK High Street and the chances are you’re going to be looking at private equity

owned firms on either side.

The Body Shop, Pizza Express, Wagamamas, Byron Burgers.

Zizzi or New Look.

In fact there are scores of High Street brands that are now controlled by private equity and similar investors.

And that was because British companies
in general became a lot cheaper.

You can see that in this chart.

Publicly traded American companies

simply became a lot more valuable
than British ones after Brexit.

A British firm that makes a dollar of
profit is on average given $11, a value.

American firms get 20.

So remember that little shop
we talked about earlier

and how its purchase was financed
with a lot of debt?

In the case of Morrisons, it was
something like 6.6 billion pounds.

Here’s the important bit.

When CD&R bought Morrisons, interest rates were low.

But since then, they have increased.

Around half of Morrison's debt that's around 3 billion pounds

is affected by interest rates going up.

So that debt is now much more expensive.

The reason that’s a problem is that Morrisons competes with

other supermarkets on price.

And now it has to pay hundreds of millions
of pounds more each year in interest payments.

They were just about making enough
money to pay their debt, which meant that

when Aldi and Lidl came in during a cost of living crisis and cut prices, Morrisons simply couldn't keep up with them.

Morissons simply couldn’t keep up with them.

That's helped Aldi overtake Morrisons
as the UK's fourth biggest supermarket.

To deal with the suffocating debt load

Morrisons has sold assets,

including a 2.5 billion pound deal
for its petrol stations in January.

It's hoping that will let it offer
lower prices to shoppers.

These problems are besetting

a lot of the businesses
that private equity has bought.

All of this matters because private equity
backed companies employ 1.9 million people

in the UK and their suppliers
employ another 1.3 million people.

When these deals go wrong, it can have real world impact.

So it can mean higher cost of goods for consumers.

And we can also see jobs lost.

This is something that a number of
politicians are already quite concerned about.

How can you ensure the increased cost
of borrowing won’t be passed on to consumers?

We’re not about sweating assets at all.

Our customer experience, CSI,
is improving as we speak today.

We’re absolutely focused in
delivering value for our customers.

We’ve seen the owners of Asda, the billionaire Issa brothers

and TDR being hauled in front of a parliamentary committee recently where they were questioned about

so called price gauging.

The Bank of England has been worried about increased private equity ownership of British companies,

they are worried about increased debt levels,

and they are worried about the
impact it will have on the British economy.

But with the general election on the horizon,
the solution may not be as simple

as imposing
higher taxes on private equity deals.

It's difficult for politicians to really crack down on private equity companies because after Brexit

Britain has been searching for external investment and options are thinning on the ground a little bit.

Proponents of private equity firms say that the money that they bring into the UK economy is super important,

because there's just not that much
foreign investment coming into the country right now.

And I think that's the line that the Labor Party, if they do come into power, is going to have to tread very carefully.