Lord Altrincham
Main Page: Lord Altrincham (Conservative - Excepted Hereditary)
Lord Altrincham (Con)
My Lords, I declare my interest as a director of South Molton Street Capital. I congratulate the noble Lord, Lord Monks, on securing this important debate about private equity and on his membership of the important French Légion d’honneur alongside Stephen Schwarzman, who is the founder of the largest private equity investment firm in the world: Blackstone.
Private equity and venture capital-backed businesses directly supported approximately 7% of UK GDP, 8% of employment and 9% of gross earnings in 2025; those numbers were, I think, referenced by the noble Lord, Lord Monks. The British Private Equity & Venture Capital Association reports that private capital-backed companies now generate around £200 billion annually in GDP for this country and support 2.5 million jobs. As the noble Baroness, Lady Moyo, pointed out, that is one in 14 jobs in the UK.
It is important for me to frame my remarks with a clear eye to both the benefits and the risks that come with private equity funds. Private equity remains well placed to deliver solid, diversified returns. Over the past two decades, it has outperformed listed equities by between 4% and 6% a year after fees, supported by both the value creation role of active ownership and the illiquidity premium.
For DC schemes supporting UK retirees, those advantages are particularly attractive, as my noble friend Lady Stedman-Scott mentioned. Local government pension pools have already saved £380 million through consolidated private equity investment, and 17 major workplace pension providers have pledged to double their private market exposure to 10% by 2030. The UK’s traditionally cautious pension landscape is clearly opening up, with an estimated £50 billion to £75 billion in new private equity commitments expected over the next five years.
Studies have found that, on average, private equity-backed firms achieve higher productivity growth, as noted by the noble Baroness, Lady Moyo, than comparable companies and often outperform on operational metrics after investment. Long-run analysis of UK portfolio companies suggests that, on average, private equity-backed firms have achieved faster growth in productivity and greater growth in organic employment than comparable private sector benchmarks. When Nat Benjamin from the Bank of England spoke to the House of Lords Financial Services Regulation Committee on 5 November, he commented on the role of private equity in supporting business:
“There have been research and studies on precisely that question—academic research. They tend to show that on average the performance of the businesses, of the corporates that are financed by private equity, tends to improve”.
Private equity and private credit providers create important professional services jobs and income and prosperity for our country and our tax base. It is in the national interest that the Government should work to preserve and strengthen this position because it delivers real, tangible benefits to people across the UK.
However, I appreciate that private equity is not without its risks. We have heard reference to the problems that have arisen in social care from the noble Lords, Lord Monks and Lord Davies, and the noble Baroness, Lady Bennett. The debt burden can become unsustainable if the business hits a downturn and debt repayments and interest eat into cash flow. The noble Lord, Lord Sikka, referenced a long list of private equity calamities in this country and the US and touched on the debacle at Thames Water, which remains a cautionary example. Successive private infrastructure investors, including Germany’s RWE and Australia’s Macquarie, left the company unmodernised and heavily leveraged while continuing to extract substantial dividends when interest rates were very low. When interest rates returned to more normal levels, Thames Water was exposed. It was clear that funding that ought to have been directed towards upgrading the Victorian sewer network, which serves 16 million people around London, was instead diverted to servicing debt.
However, it is important that we do not let these risks deter us from supporting private equity. The question is not whether these funds are wholly good or wholly bad, but how we can manage and engage with them as parliamentarians and Ministers—and, in the noble Lord’s case, as a Government—in a way that minimises risk and maximises benefits for the British public. I welcome that it seems to be in this spirit that the FCA proposes to alter and develop the regulatory regime surrounding alternative investment funds to allow more flexibility for smaller funds, saying that it believes that,
“clearer rules, better tailored to firms, could create efficiencies in how firms do business and further support economic growth and competition”.
Private equity funds have the capacity and potential greatly to benefit our economy. We need to make sure that any changes to the regulatory environment support growth and embed efficiency. We on these Benches will look at this closely as the FCA’s consultation concludes and steps are taken in this direction.
We need to appreciate that the success or failure of these funds is also determined in part by the macroeconomic environment, which the Government have a substantial hand in creating. I appreciate that the Minister cannot comment on specific measures in the Budget, but can he assure us that the Government are forming their plan with a mind to enabling private equity funds and alternative investment funds to continue to contribute to the economy? Does he also recognise that, however they are presented, tax changes can have a real effect on market actors, such as private equity funds, which play an important role in investment, employment and growth? What steps is the Treasury taking to assess and mitigate any unintended consequences so that tax policy does not inadvertently undermine the Government’s growth objectives? I look forward to hearing from the Minister on these points and his response to the other questions raised by noble Lords.