Chief Investment Officer viewpoint - July 2024

News: Insight & Opinion | 1 July 2024

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Will things get better (or worse) for private equity under a Labour government, asks Michael Mowlem

It’s 27 years since Labour last came to power and I remember that moment well. I was in the final months of my decade as an investment banker, about to embark on my long career in private equity. With a new Labour government now in power, many in the private equity (and wider) world are pondering what this will mean.

The private equity industry seems to be in the Labour Party’s sights. How worried should we be, given the negative comments made about private equity by various Labour politicians in recent years and the ambiguity surrounding the party’s plans on capital gains tax? My conclusion is that, if history is anything to go by, there are reasons to be optimistic.

During the Blair/Brown years, the UK private equity industry saw a dramatic change from its nascent beginnings in the mid-1980s. Our own research shows there were 416 private equity firms in the UK in 1997, but by 2010 when the party left power this had quadrupled to 1,669.

The sector’s contribution to the British economy also grew significantly in this time: one study puts UK PE investments as a share of GDP at 0.41% in 2002, and by 2011 this had reached 0.59%. Employment across the private equity sector, including among fund managers, the advisers that support the industry, and more broadly across portfolio companies, grew rapidly.

Labour can’t take the credit for all this. The sector benefited from many fundamental shifts: sustained low interest rates, the reduced attraction of IPOs, continued evolution of the product and the increased professionalism of our industry. Meanwhile the economy performed strongly (until 2008) and GDP growth, often regarded as the key driver for private equity activity, helped boost investment and consumer spending - making deals in sectors such as casual dining, cinemas and travel more appealing.

However, government initiatives did have an impact. For example, significant investment in health and social care was triggered following the Wanless Report in 2002, which reviewed long term funding for the NHS. For the next five years, the NHS was awarded well over twice the long-run average in real terms growth in funding. Social care also received a significant funding boost.

The drive to cut NHS waiting lists led to increased business for private hospitals. This spurred investment, and nearly all private hospitals changed ownership during the 2000s. A new dentistry contract attracted private equity to consolidate a fragmented sector. Investment in social care brought the industry’s attention to care homes.

The Sure Start programme increased nursery and pre-school places for children and private equity-backed groups emerged to professionalise the sector. Meanwhile, life sciences saw significant venture capital activity as smaller entrepreneurial businesses sprung up out of the major multinationals. The tech industry went through the 2001 dotcom crash but sectors such as gaming received significant investment and thrived to create some world leaders in the space.

That’s not to say there weren’t negatives: sustained low interest rates and looser regulation led to increased leverage in UK buyouts, contributing to problems post-financial crisis but the industry worked through these issues to protect values.

Who knows what the future holds? The current Labour regime has been keen not to say too much, but during their last period in government private equity experienced a boom. The million dollar question is: will that happen again? As we all know, past performance gives no guarantees for the future, so we will have to wait and see if 'things can only get better'.