Financial Stability: Private Equity Firms

Baroness Bennett of Manor Castle Excerpts

Wednesday 13th December 2023 Lords Chamber

Asked by

[Baroness Bennett of Manor Castle]

To ask His Majesty’s Government what assessment they have made of risks to financial stability from private equity firms experiencing difficulty in the current high interest rate environment.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Bank of England’s Financial Policy Committee is responsible for identifying and addressing risks to the stability of the UK’s financial system. The committee’s most recent judgment is that the system of market-based finance, which includes private equity, has so far been able to absorb recent changes in macroeconomic conditions.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I thank the Minister for her Answer; I think the key words in it may have been “so far”. If multiple private equity companies experience financial stress simultaneously, it could have systemic implications. This is especially true if those companies operate in interconnected industries, leading to a potential domino effect of financial distress that could spread to the broader economy. The UK is the second largest private equity market in the world, with nearly £80 billion of private equity going in in the last five years. Are the Government really assessing the situation and considering whether there need to be restrictions on the role of private equity in our economy and society, given how many companies have been taken over by private equity and subsequently closed down?

[Baroness Vere of Norbiton (Con)]

I am afraid I do not recognise the picture the noble Baroness paints, nor do I agree that private equity needs to be closed down. The Bank of England monitors the situation across the entire market-based financial system. The noble Baroness may be interested to know that the Bank of England is conducting a system-wide exploratory scenario, which will be a world first and will look at all the elements of the financial system and stress-test them in quite severe circumstances to ensure that there is no contagion. The noble Baroness is not right to say that there is a massive risk of contagion. The private equity sector is a very small part of our financial system.

--- Later in debate ---

[Baroness Vere of Norbiton (Con)]

I completely agree with my noble friend. Private equity is all about risk and returns, and not all firms will succeed in perpetuity. That is the way of a capitalist market, and it allows the correct allocation of capital within the system.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I am glad that the noble Lord, Lord Young, pays such attention to the Green Party manifesto; it is pleasing to see. On the reference to so-called green environmental investments, does the Minister agree with me that it is essential for the future of the British economy, in meeting the needs of British society, that we invest in renewable energy and warm, comfortable, affordable-to-heat homes in order to effect the transformation we need for a healthy society?

[Baroness Vere of Norbiton (Con)]

Actually, I would flip that around the other way. I had a long conversation with the head of ESG at the FCA about this, and it is the public and investors in pension schemes who want to see investments in higher rated ESG organisations. That is the key driver: it is ensuring that the capital goes to the places the investors want to invest it in.