PizzaExpress is cutting jobs and closing restaurants as part of a sweeping restructuring deal agreed with owner Hony Capital, the Chinese private equity firm © Bloomberg

When Richard Branson found that EU state aid rules stopped his Virgin Atlantic airline from accessing government-backed Covid-19 loan schemes, his calls for state help fell on deaf ears. It was a similar story last week when Tata Steel and Jaguar Land Rover were sent away with a clip round the ear and empty bowl like a latter-day corporate Oliver Twist. 

How Branson and the Tata bosses must be grinding their teeth at news that ministers could soften the rules on eligibility to some Covid loans, apparently at the behest of the private equity industry.

Worried about the fragility of buyout-backed businesses, especially those heavy employers in the retail and service sectors, the government is thinking of agreeing that their owners can treat the shareholder loans they have made as equity.

EU rules are designed to stop taxpayers chucking good money after bad by setting viability criteria. If a company has burnt through more than half its ordinary equity, the owners must stump up first — not the state.

This is a particular headache for private equity because of the way it finances purchases. True, shareholder loans are used to take advantage of the favourable tax treatment of debt interest, although Britain has recently restricted this benefit. A bigger issue is that they are used to minimise the ordinary equity to a sliver. That allows the operating managers to mortgage their own homes for a few million quid and buy a meaningful stake in a large business worth hundreds of millions — or more. 

Critics will argue that private equity has made its bed and should lie in it. Mr Branson had to sell part of his highly valued Virgin space business to bail out his airline. Why should not buyout firms — apparently groaning with “dry powder” — do the same?

Of course, buyout groups will argue they aren’t playing with their own money but that of pension funds, and therefore they must cleave to strict financial criteria. But that only raises a further disagreeable possibility: that private equity bosses are simply buying options over investee companies with taxpayers’ cash.

Realpolitik may dictate some softening of conditions. But ministers should remember that there’s a political cost to cutting deals that are seen to favour private equity. It isn’t just Branson who is watching. Taxpayers are too.

A bad debt dalliance

For every underdog David who successfully takes on champion Goliath there are many more who fail, Cat Rutter Pooley writes. An army of contenders has battled the UK’s Big Six energy suppliers over the past decade, picking up customers through promises of better service and cheaper prices. Some had already fallen by the wayside before the pandemic, defeated by thin margins and fierce competition. But now rising bad debts caused by the Covid-19 downturn could pick off more.

Plucky competitor Bulb is the latest to voice the industry’s fear: that customers will give up on paying their bills when support schemes end.

The big guns have already said they’ll suffer. Bad debts cost Centrica, proud parent of Big Six supplier British Gas, £60m of adjusted operating profit in the first half of the year. That number could rise in the second half. At EDF bad debts cut earnings before interest, taxes, depreciation and amortisation by about €144m, €39m of which came from the UK. Scottish Power’s owner Iberdrola last week reported €71m of ebit impact from bad debts so far; €18m in the UK.

But even if economic projections are sufficiently uncertain that Centrica can’t give full-year financial guidance, bad debts are small in the scheme of things. Eon says it has seen only a slight change to payment behaviour so far. Lower energy consumption has a larger earnings effect.

Of the challengers spawned since 2010, the biggest should survive a downturn — though up-to-date data is scarce. Bulb has a good growth story and private equity backers behind it, despite £128m in losses in the year to March 2019. Octopus Energy, another upstart that made a loss in its April 2019 accounts, secured itself a £1bn-plus unicorn valuation this May. Ovo Energy, almost 11 years old, is in essence a Big Six supplier thanks to its acquisition of SSE’s retail business.

Bad debts could put paid to some smaller suppliers in short order though. A seasonal cash squeeze caused by mandatory renewable energy payments is coming up. That has done for providers in the past. Last year four failed to pay by the end of October; two of those ceased trading. Compound that with rising customer defaults as unemployment surges and it is easy to see how challengers’ strength may be sapped.

If some do fold, their loss should not be mourned unconditionally. Challengers are not saintly. Watchdog Ofgem has sanctioned Ovo, Bulb and Utility Warehouse for failings so far this year. The stranglehold of the Big Six is weaker than it once was. With fifty-plus rivals still out there, competition lives on.

Private equity: jonathan.ford@ft.com
Energy: cat.rutterpooley@ft.com

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