ALEX BRUMMER: End of the era of debt-fuelled private equity deals

The gung-ho era of private equity deals, largely financed by bank debt, is coming to a shuddering halt. 

A combination of surging interest rates and an abrupt end to the post-financial crisis years of free and easy money is causing serious damage.

When last remaining buyers, Apollo and India’s Reliance Industries, pulled out of the contest for High Street chemist Boots, the company cited ‘market instability severely impacting financing availability.’

A combination of surging interest rates and an abrupt end to the post-financial crisis years of free and easy money means 

In another sign of stress, buyout kings KKR and the ‘vampire kangaroo’ Macquarie have retreated from the £15billion takeover of UK Power Networks, owned by Hong Kong entrepreneur Li Ka-shing.

In abandoning the deal, the buyers blamed a last minute hike in the price demanded by the Hong Kong owners due to inflation.

In the past, a compromise might have been reached, but private equity barons are becoming more wary.

The Wall Street Journal reports that the investment banks – including Bank of America, an already overstretched Credit Suisse and Goldman Sachs – collectively could face billions of dollars of losses on buyout loans which they agreed to finance in boom times.

In echoes of the sub-prime mortgage crisis, when low quality loans were packaged up and sold on to financial buyers, the investment banks parcel up the debts and sell them on to investment funds and collateralised loan managers.

The price of that debt has been tumbling in recent weeks leaving the holders with big potential losses.

In the US, a recent public-to-private deal for cloud computing firm Citrix Systems signed in January is seen as vulnerable. Overall, private equity deals in the US have declined 20 per cent to £113billion so far this year.

Here in Britain, late cycle deals for grocers Morrisons and Asda, both losing ground to rivals in the supermarket wars, are viewed as potentially struggling because of the amount of debt on their balance sheets.

Morrisons is reported to be looking at sale and leaseback arrangements on some of its assets as a means of bolstering its finances.

The crunch for private equity may be too late to save the British engineering and defence group Ultra Electronics from the hands of Advent – which dismantled Cobham in better times. 

It demonstrates the recklessness of allowing valuable national security assets to fall into unsafe, indebted owners, even if the Government does think it has won watertight guarantees.

Good science

The vow by Keir Starmer not to reverse Brexit, or attempt to rejoin the Customs Union or Common Market, will come as a blow to opinion formers demanding ‘relitigation’ of Britain’s departure from the EU.

Instead, Starmer and his colleagues insist they are more capable of sorting out legacies of the Brexit deal – such as the Northern Ireland protocol – better than the Tories.

Among the more disturbing aspects of the row over Northern Ireland is the decision by Brussels to use an agreed deal over science funding as a weapon in the debate.

As part of the Brexit deal, it was agreed that the UK, with its leading edge research skills and facilities, would remain part of the Horizon research project to which the UK has committed £15billion over seven years. 

This would have ensured that research funding, which has attracted the best and the brightest of European scientists to the UK’s top labs, would continue.

In a decision last week, the European Research Council revealed it was axing 115 grants to UK-based scientists. Of these some 19 have said they would move their projects from Britain to the Continent.

The science minister George Freeman finds himself in an arm wrestle with the Treasury over repatriating the Horizon funds directly to UK universities to halt the brain drain. 

Backing British research should be a no-brainer for penny pinching Treasury mandarins at a moment when the Chancellor Rishi Sunak wants to refocus on R&D and productivity

White flag

AO World, with its high service standards, has been a trailblazer for British ecommerce. So the 18.2 per cent plunge in its share price yesterday, and the cash depletion, is deeply worrying. 

The loss of credit insurance suppliers is never a positive development in the highly competitive electronic and white goods industries. 

In previous retail crises, it was among the first signs of stress at Woolworths, HMV and Comet.

None of that ended well.