ALEX BRUMMER: The perils of private equity

The liability-driven investment (LDI) debacle, which threatened the country’s pension funds, has rightly drawn attention to the security of the financial system.

Most potential problems are thought to hide in the less regulated non-banking sector, such as LDIs. But one should not imagine that the High Street banks are as solid as enforcers would have us believe.

Former Lloyds CEO Antonio Horta-Osorio boasted after the financial crisis that he had saved the bank by replacing billions of pounds of short-term financing with safer, long-term capital.

Yet we have now learned that at the height of the treasury and LDI collapse, when the Bank of England feared a cascade of insolvency due to highly leveraged loans, Lloyds had a high exposure – around £52 billion – to the ‘repo’ (short-term secured loan) market. It’s not just investment banks playing in the casino-style derivatives space.

Authorities are also concerned that private equity players in UK financing, which operate on a highly leveraged model, could be vulnerable to the sudden surge in both short-term and longer-term interest rates.

Some glimmers of stress have been seen at Morrisons, a supermarket chain owned by Clayton, Dubilier & Rice, looking to sell assets.

A study by midcap broker Numis suggests that despite the low cost of borrowing coming to an end, private equity, which has exposed the lower echelons of the FTSE 100, is far from being out of the game.

The poll of 200 senior private equity players suggests political turmoil has not changed the dial and the UK remains attractive. About 73 percent of private equity leaders surveyed are still interested in London-listed companies.

“A whopping 92 percent find London attractive because institutional investors are more likely to sell at the right price and the regulations are less onerous than elsewhere”

A staggering 92 percent find London attractive because institutional investors are more likely to sell at the right price and the regulation is less onerous than elsewhere.

No one can view the attack by private equity on Britain’s second-rate tech, aerospace and defense companies with anything but apprehension.

It was a campaign by this newspaper that prevented the insurance and pensions mutual LV+ from being swallowed by Bain. The Numis study does show that despite skepticism about Britain’s ability to finance its current account deficit, concerns about the country’s reliance on the ‘friendliness of strangers’ have been exaggerated.

For better or worse, the UK remains a honeypot for investment.

Pension chaos

Pension fund directors are so obsessed with closing funding shortfalls that they are susceptible to mercury schemes from pension advisers and investment bankers.

The disruption to the proper functioning of the financial markets as a result of the miniBudget is already being investigated by the Treasury Select Committee.

The consequences for the UK’s defined benefit system were potentially far more catastrophic than those at the Mirror Group Pension fund, when it was sacked by Robert Maxwell, or at BHS, which became a celebrity.

The House of Commons Work and Pensions Committee is right to launch an investigation into the regulatory system that allowed LDI to erupt. The Bank of England was already more than aware of the vulnerabilities in 2018 and has put pressure on the system. It is not clear whether the Pension Supervisor could cope with the task of overseeing complex funds that form the heart of the system.

Pension fund managers are so obsessed with closing funding shortfalls that they are susceptible to mercury schemes from pension advisors 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 maximize the returns of ‘super safe’ fixed income positions. With the pension incomes of up to 10 million British retirees at stake, the importance of the hearings cannot be underestimated.

Store activist

Mike Ashley may have handed over formal management of his Frasers group to son-in-law Michael Murray. But he can’t resist a bargain. Debenhams’ experience, when he lost £180m on an equity investment, hasn’t dulled his enthusiasm.

His latest target is online retailer Asos, in which Frasers has announced a nearly 5 percent stake, while the stock — some 78 percent below its peaks — is on its knees. It also continues to build a stake in the emblematic German designer Hugo Boss, in which it has a £840 million stake.

Together with its interests in N Brown, Australian retailer Mysale and many more, Frasers Group is building a new 21st century retail conglomerate.