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You don’t have to look far on Google to find plenty of articles condemning private equity and arguing against its influence on national economies. Yet few people are prepared to criticise it when it could provide the vital, additional capital they need to support their business growth.
Here at Bure Valley Group, we offer some thoughts on why private equity sometimes gets a bad reputation and highlights some of the positive impacts it has upon jobs, businesses and overall economic growth. To find out more about our own EIS and other investment opportunities, visit our portfolio page here. To enquire about our latest projects and funding, you can reach us via:
+44 160 334 0827
Why private equity attracts criticism
Investment funds such as private equity often attract negative comments from the political left, which may wish for their activities, revenues and influence to be curtailed (or even eliminated). Such ideological views are often entrenched and get bogged down in philosophical discussion, which isn’t really our focus here. A more cross-political criticism of private equity, however, is the risk that private equity can pose to jobs.
One case study is an interesting case in point. According to one report, in 2010 a segment on PBS NewsHour drew ire from the CEO of the Private Equity Council in the U.S. (now called the American Investment Council). The criticism was the segment focused excessively on negative stories about private equity and ignored “success stories” such as the rescue of Toys R Us by three private equity firms in 2005. Sadly, whilst this private equity intervention had arguably saved Toys R Us from bankruptcy at the time, it still eventually went bankrupt in 2017 – losing 30,000 jobs in the process.
The flipside – how private equity helps
The Toys R Us example above is an interesting one because it could, indeed, also highlight the positive aspects of private equity. Had the three private equity firms not stepped in in 2005, tens of thousands of jobs would almost certainly have been lost earlier. The failure of Toys R Us seven years later does not necessarily show that this was inevitable. With the right positioning, decision-making at the top and environmental conditions, perhaps things would have turned out differently and many of those jobs would have been saved.
Going beyond such speculation, however, there is also evidence that private equity can, overall, have a positive impact on an economy. Private equity is, historically speaking, a relatively recent feature of the UK economy – traced back to the end of World War II, when the Industrial and Commercial Finance Corporation (ICFC – now 3i) was founded. In the aftermath of this devastating conflict, many small and medium-sized businesses (SMEs) were struggling to get back on their feet and grow due to a lack of funding from the banking sector. The ICFC played a big role in stepping in to provide long-term investment funding, enabling many unquoted companies in the UK to step further into their potential in the post-war period.
Bringing things into the years leading up to 2020, moreover, private equity has played a crucial role in boosting UK economic growth. According to the British Private Capital and Venture Association (BVCA), approximately 1,300 UK businesses receive private equity investment each year. Many of these have experienced considerable growth themselves, boosting jobs and tax revenues for the Exchequer. Indeed, in each of the five years preceding 2006/7, companies backed by UK private equity employmed 8% more people worldwide. This is impressive compared to the 0.4% p.a. and 3% p.a. achieved by FTSE 100 and FTSE Mid-250 companies within the same period. When you add it all up, around 3m people in the UK were employed by companies backed by private equity – equivalent to 21% of UK private sector employees.
Why private equity is needed in 2020
2020 has been overshadowed by COVID-19, the lockdown and the huge economic damage that has ensued as a result. In August, the Bank of England (BoE) announced that the UK had officially entered recession for the first time in 11 years – also, the worst in 100 years, with a GDP contraction of over 20% in the second quarter. Many UK politicians across the political spectrum have lined up to argue that the primary course open to the country, in the face of such huge damage, is to “grow our way out”. This is where private equity could play a crucial role – not just in growing individual companies and generating a return, but also in supporting the wider recovery of the UK economy.
Private equity has been pivotal to job creation, economic growth and innovation in the UK in the decades since 1945. In the present market conditions opportunities still about for private equity firms to continue these positive influences.
Here at Bure Valley Group, we connect successful investors with vetted, promising companies seeking funding to increase their business growth. Get in touch today to start a conversation with our team, and discuss some of the great investment memorandums we have available:
+44 160 334 0827