With long-established names like Debenhams, Topshop and many others vanishing from the town centers across the United Kingdom, it would be easy to blame the rise of e-commerce – spurred on by the pandemic – for the decline of the high street. But there are also other forces at work. Investment decisions made years ago by private equity firms are often instrumental in helping push longstanding retailers to the brink.
The presence of private equity is both a symptom and a cause of the disappearing high street. While private equity can seem far removed from most people’s lives – big investors moving their money between firms and funds that few have ever heard of, the truth is that their choices can actually have a significant impact on the rest of the economy.
Private equity refers to a type of investment in companies that are not publicly listed on the stock exchange (or the purchase of public companies to make them private). Private equity investors have a reputation for buying companies, loading them with debt to fund strategic change and sacking workers in a bid for efficiency. Take the example of Debenhams. The company was taken private in 2003. It made a short-term profit by selling 23 shops for £495 million and leasing them back from the new owners.
It was then returned to the stock market in 2006, making considerable profit for the private equity group but also leaving the company saddled with a debt of £1 billion – ten times what it had before the private takeover. This left the retailer ill-prepared to deal with the rise of internet rivals. Fifteen years later, the struggling company has finally been liquidated and the brand bought by online clothes retailer Boohoo, putting around 12,000 jobs at risk.
This is far from a unique occurrence for the high street. Toys “R” Us, Maplin, HMV and Poundworld are examples of other retailers in the UK that have filed for bankruptcy in the years after private equity takeovers. (In the U.S., J. Crew is a good example). A study by a number of campaign groups found that 10 of the 14 largest retail bankruptcies in the U.S. since 2012 involved private equity owners, and that such companies were twice as likely to go bankrupt as public companies.
Responsible investing is increasing
Given these problems, the approach of private equity investors has been fiercely debated for years. But evidence suggests things might be changing. A growing number of private equity firms are placing more emphasis on the environmental, social and governance (“ESG”) sustainability of their investments, as a way of helping businesses achieve long term financial returns.
A recent PWC survey found 91 percent of private equity firms declared that they had developed a responsible investment strategy or ESG policy. Last summer more than 400 asset managers, controlling more than $1.6 trillion (£1.2 trillion) of other people’s money, signed up to the United Nations’ principles for responsible investment, which provide a guide for how to incorporate ESG issues into investment practices.
This can involve influencing companies to ensure they protect workers’ rights around decent wages, pensions, and severance packages. Adopting responsible investment principles is hardly a direct fix to some of the fundamental problems of private equity around assets stripping and loading up on debt. But it could get the private equity industry to review some of their more contested investment strategies if they clash very systematically with their proclaimed social impact aspirations.
Yet, while it is good that a rising number of private equity players are embracing more responsible principles, the road ahead is still full of challenges. It is not enough for funds to have ESG targets. Investors such as pension funds – as well as regulators and financial activist groups – need to be extra-vigilant about how private equity players behave. This is made all the more urgent now that private equity owners of struggling businesses will be allowed to access taxpayer-backed loans to support them in the wake of the pandemic.
Ordinary people also can start questioning how their own investments such as pensions are being used. They can also engage with their MPs on the regulation of private equity regarding some of their most predatory investment practices.Debenhams’ failure sadly shows that we may all ultimately pay the price for short-term investment goals. With the advent of responsible investing, private equity firms should now be making decisions they believe will have a long long-term benefit to society.
Stephanie Giamporcaro is an Associate Professor of Sustainable Finance at Nottingham Trent University. (This article was initially published by The Conversation)