BVCA chair: PE will ‘get it in the neck’ for being good fiduciaries

PE firms need to explain to nearly a million UK portfolio company employees that the industry's job is to back the 'winners' of the covid-19 crisis, a conference has heard.

Expect private equity to be severely criticised for its business model over the next 12 months as the UK looks forward to economic recovery amid the health emergency, according to the chairman of the British Private Equity & Venture Capital Association.

Speaking at the BVCA Summit 2020 on Wednesday, Neil MacDougall, chairman of Silverfleet Capital and BVCA Chair 2020/21 said one of the challenges over the next year is to ensure the industry’s critics realise not all PE-backed businesses are struggling amid the pandemic.

MacDougall (extreme right): PE’s job is to back the winners

“Some of the companies may have done really well and they may do things like dividend recaps, which will be regarded as horrendous,” MacDougall said. “If you’ve got an IT company that’s been booming and your profits have gone up significantly – why wouldn’t you?”

“On the other side, private equity is going to get it in the neck. One of the things we do is we just cut our losses. It’s just the way that investors expect you to behave, it’s your fiduciary responsibility to your investors.”

However, what may be a good deal for investors does not always translate to a good deal for other stakeholders, including employees and consumers. This can be seen in restaurant chains and pub companies that are cutting back to the core of what will be profitable over the long-term, MacDougall added.

“I’m afraid marginal capacity, marginal outlets, marginal locations are going to unfortunately go to the wall over the coming period,” he said.

“You can’t save every position, but you can save certain ones and that’s what’s going to happen.”

These actions are fundamental because they free up resources, capital and talent to go into the growth parts of the economy, he added. “It’s fundamental that we don’t have businesses kept alive by subsidy, which has to ultimately be switched off.”

Some 972,000 people in the UK are currently employed by private equity or venture capital-backed companies, an increase of more than 100,000 on a year ago, according to  BVCA director general Michael Moore.

Over the last five years, £43 billion ($55.5 billion; €47 billion) of investments have been made by PE and VC firms in all parts of the country, including £11 billion into the north of England and the Midlands, Moore said. Across the UK, nearly nine out of 10 companies are small and medium enterprises.

MacDougall said on the panel PE firms need to explain there are “winners and losers”, and that the industry’s job is to back the winners.

“That’s how we help make this economy successful again and that’s how we introduce growth.”

However, there needs to be sensitivity about how the transition intro growth is handled, said Jeannie Drake, British Trade Unionist and Labour Life Peer, who also spoke at the panel, noting the need to make clear to the government and the public what the “end-game societal benefit will be”.