Stock market floats tumble to 11-year low as private equity circles struggling firms

Linda J. Dodson

Asked about the rise of private equity, Jason Zemmel, a partner at City law firm CMS, said: “I can’t see any reason why it’s not going to continue like this.” 

He said the combination of a “wall of money” built up by private equity funds keen to find investments and a market where businesses want to avoid red tape means the trend towards companies seeking to use private money to grow is likely to continue.

Private equity firms around the world have a record $2.5 trillion in so-called dry powder  waiting to be invested.

Mr Zemmel said advisers are having a lot of discussions about potential private equity investments in the final months of the year. 

Private investments tend to be quicker and more private than stock market listings, which are closely scrutinised, must follow a rigid process and are subject to the whims of the market. 

However, private equity ownership is controversial because the industry typically weighs down companies which it supports with huge debts, is prepared to ruthlessly cut jobs and has no compuction about shifting work abroad.

Many of the largest players – such as behemoth Blackstone, which owns Alton Towers operator Merlin Entertainments and Britain’s railway arches – are based in the US. Blackstone always insists it is one of the most ethical players in the industry.

Private equity-backed companies could benefit from a government support package for firms which have been prevented by EU state aid rules from accessing state-guaranteed loans, under plans being considered by ministers.

The rules, which prevent state support for companies incurring losses greater than 50pc of their share capital, prevent many private equity backed companies from accessing loans due to their heavy debts. 

Plans to find a way around the restrictions were first reported by the Financial Times.

A Government spokesman said: “We are continuing to explore whether more can be done to support these businesses within the parameters of EU state aid rules.” 

Industry sources questioned how much of a difference any change would make, as the state aid rules have already been relaxed for smaller firms using the Coronavirus Business Interruption Loan Scheme (CBILS). 

Loans for bigger companies under the Coronavirus Large Business Interruption Loan Scheme (CLBILS) come with conditions attached, including in relation to the payment of dividends. This means they are likely to be unattractive to private equity investors even if state aid rules are relaxed.

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