ALEX BRUMMER: The Perils of Private Equity

Liquidated Liability Investment (LDI), which threatened national pension funds, rightly focused attention on the safety of the financial system.

Most of the potential problems are believed to be hidden in the less regulated non-banking sector, such as LDI. But don’t think that High Street banks are as tough as law enforcement would have us believe.

Former Lloyds chief executive Antonio Horta-Osario boasted after the financial crisis that he had made the bank safe by replacing billions of pounds of short-term funding with safer, longer-term capital.

However, we have now learned that at the height of the Gilts-LDI collapse, when the Bank of England feared a cascade of defaults from highly leveraged borrowing, Lloyds had a large exposure – around £52 billion – to “Repos” (short for secured credit ) of the market. Investment banks aren’t the only ones playing casino-like derivatives.

The authorities are also concerned that private equity players in the UK financial sector, operating on a highly leveraged model, could be vulnerable to sudden rises in both short- and long-term interest rates.

There have been some glimpses of stress with supermarket Morrisons, owned by Clayton, Dubilier & Rice, looking to divest assets.

Despite the end of low cost borrowing, private equity is far from out of the game, exposing the bottom of the FTSE 100, according to a survey by mid-cap broker Numis.

A survey of 200 senior private equity players suggests political turmoil hasn’t moved the dial and the UK remains attractive. Some 73 percent of private equity executives surveyed are still interested in London-listed firms.

“An astonishing 92 per cent find London attractive because institutional investors are more likely to sell at the right price and the regulatory environment is less rigid than elsewhere”

An astonishing 92 per cent find London attractive because institutional investors are more likely to sell at the right price and the regulatory environment is less rigid than elsewhere.

No one can regard the onslaught of private capital on Britain’s second-tier engineering, aerospace and defense companies with anything but alarm.

It was this newspaper’s campaign that prevented Bain from gobbling up LV+ Mutual Insurance and Pensions. Numis research shows that despite skepticism about the UK’s ability to finance its current account deficit, concerns about the country’s dependence on the “kindness of strangers” are overblown.

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

Pension mess

“Pension trustees have become so obsessed with closing the funding gap that they have become vulnerable to the ritualistic schemes of pension advisers and investment bankers”

Disruption of the smooth operation of financial markets in connection with the mini-budget is already being considered by the Treasury Committee.

The consequences for Britain’s defined benefit pension system were potentially far more catastrophic than those for the Mirror Group pension fund when it was looted by Robert Maxwell, or for BHS, which became a cause celebre.

The House of Commons Work and Pensions Committee is rightly launching an inquiry into the regulatory system that allowed LDI to explode. The Bank of England was more than aware of the vulnerabilities back in 2018 and conducted a stress test of the system. It is unclear whether the Pensions Authority was up to the task of overseeing the complex funds at the heart of the system.

Pension trustees have become so obsessed with closing the funding gap that they have become vulnerable to the ritualistic schemes of pension consultants and investment bankers. The committee will be advised to call Next boss Lord Wolfson.

He is one of the few FTSE 100 executives to have questioned the use of complex derivatives to maximize returns on “super safe” fixed rate holdings. With the pension incomes of up to 10 million British pensioners at stake, the importance of the hearing cannot be understated.

Shopping activist

Mike Ashley may have handed official management of his Frasers group to son-in-law Michael Murray. But he can’t resist the deal. The experience of Debenhams, where he lost £180 million on equity investments, did not dampen his enthusiasm.

Its latest target is online retailer Asos, in which Frasers has announced a nearly 5 per cent stake, while the share – around 78 per cent below its peak – is on its knees. He also continues to build interest in famous German clothing designer Hugo Boss, in which he has an £840m stake.

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