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Private Equity: Economic and Social Risks

Volume 823: debated on Thursday 21 July 2022

Motion to Take Note

Moved by

That this House takes note of the economic and social risks created by the regulation and practices of private equity.

I am grateful for an opportunity to exchange some thoughts about private equity, a subject that should really concern us all. In my view, it is likely to be the location of the next major financial crash, and there will not be enough money to bail out the affected entities. Private equity is enmeshed with numerous other parts of the economy. It gets its cash from insurance companies, pension funds, banks, local authorities, trusts and wealthy individuals. The Government’s quantitative easing of £895 billion has also provided vast amounts of resources to these firms.

Private equity consortiums function as banks but are not actually regulated as banks. There is no minimum capital requirement, no control on leverage and no stress tests, even though the collapse of a private equity firm can destabilise all other sectors. The recent collapse of the US-based Archegos Capital Management shows how quickly the domino effects spread. It very quickly depleted the capital buffers of Goldman Sachs, Morgan Stanley, UBS and Credit Suisse. My first question is: can the Minister publish the Government’s assessment of the possible domino effects which may arise from the collapse of a UK-based private equity firm?

In a light-touch environment, private equity has been cooking its books. Recently, the Financial Times reported that parts of the private equity market resemble Ponzi and pyramid schemes. Private equity firms are transferring assets between each other at knowingly inflated prices to bump up profits, balance sheets and returns. My second question is: can the Minister explain what estimate has been made of balance sheet and profit inflation by the UK-based private equity firms, and what are the Government going to do about it?

In 2021, 803 private equity buy-out deals, worth some £46.8 billion, were completed. This investment is welcome, but private equity also poses threats to jobs, pensions, the country’s tax base and the wider economy. On average, private equity retains its interest in a company for 5.9 years, sometimes a lot less. There is no long-term commitment to any place, product, workers or customers. We all know that short-termism has been holding this country back for years. Financial engineering, tax avoidance and opacity are key parts of the private equity business model. Short-term returns are extracted through related party transactions in the form of rental payments, management fees, royalties and much more.

Private equity eliminates the downside risk of bankruptcy by injecting finance not as equity but as secured debt. This means that, in the event of bankruptcy, private equity needs to be paid first. Inevitably, unsecured creditors recover little, if anything, of the amount due to them. I give some examples. Bernard Matthews, Bon Marché, Cath Kidston, Comet, Debenhams, Flybe, Maplin, Monarch Airlines, Payless Shoes, TM Lewin and Toys “R” Us are just some of the monuments to the predatory practices of private equity are just some of the monuments to the predatory practices of private equity. All too often, wages are pushed down, jobs lost and pension schemes looted to generate short-term returns for private equity.

In September 2013, private equity firm Rutland Partners acquired a £25 million stake in Bernard Matthews. The company was then loaded with bank borrowing and a secured loan from Rutland, which carried an interest rate of 20% per annum. Asset stripping began straightaway. In 2016, the assets of Bernard Matthews, but not the whole business, were sold off for £87.5 million to Boparan Private Office. Rutland made a quick profit of £13.9 million. The key was dumping the amount owed to unsecured creditors and the £75 million deficit on the employee pension scheme, which eventually resulted in 700 employees losing some of their pension rights. At the time, I was advising the House of Commons Work and Pensions Committee on the case and, on 3 March 2017, the committee wrote to Boparan to ask why it bought only the assets, not the entire business, including liabilities to unsecured creditors and the pension scheme. Boparan replied that it had offered to buy the whole company, including its liabilities, but the offer was rejected by Rutland because, by dumping liabilities and the pension scheme deficit, it stood to make a bigger profit.

The business model of private equity is all about asset stripping and dumping pension obligations. This pattern is visible across many private equity businesses. Silentnight appointed KPMG as administrator to enable its rescue but the firm did not actually do that. KPMG and its insolvency partner deliberately pushed Silentnight into insolvency, so that private equity firm HIG, a client coveted by KPMG, could buy the company out of administration at a lower price by dumping pension obligations to employees. About 1,200 workers lost some of their pension rights. That is a criminal act. The partner of KPMG lied—he has been found to have lied by the regulators—but the Insolvency Service has not mounted any criminal prosecution. Indeed, the Government have rewarded KPMG by giving it lots of public contracts.

Water companies have long been exploited by private equity. From 2006 to 2017, Thames Water was owned by a private equity consortium fronted by Macquarie Bank. During this period, Thames Water’s debt ballooned from £2.4 billion to £10 billion, mostly from tax haven affiliates, and interest payments paid to the group itself swelled the charges for customers. For the period of its ownership, private equity extracted £1.2 billion in dividends, plus £3.186 billion in interest payments. The company’s tax liability for the years from 2007 to 2016 totalled only £100,000, but we know that billions of litres of water leaked away and the company dumped raw sewage into the rivers. Meanwhile, the private equity investors got a return of between 15.5% and 19% a year.

In 2007, Alliance Boots was bought by a private equity firm, Kohlberg Kravis Roberts. The company’s control immediately shifted from Nottingham to Zug in Switzerland. The buyout was financed by the borrowing of £9 billion and loaded on to the company. This enabled the extraction of profits and profit shifting; and Alliance Boots engaged in a series of transactions through entities in Luxembourg, the Cayman Islands and Gibraltar to transfer profits. The net result was that Alliance Boots, which relied heavily on revenue from NHS prescriptions, dodged taxes in this country of £1.28 billion.

Asda has been bought by private equity firm TDR Capital, in conjunction with the billionaire Issa brothers. What was the company’s first step? To set up a parent company in Jersey. We know what will follow: a lot of financial engineering and tax avoidance.

Morrisons has been bought by Clayton, Dubilier and Rice’s offshore vehicle, Market21 GP Holdings, which is registered in the Caribbean. The supermarket is now controlled by a newly created entity in the Cayman Islands. We know the next step: asset stripping, profit shifting and tax avoidance.

The involvement of private equity in social care is a source of crisis. Private equity firms own one in eight care home beds in England. They typically load debts of around £35,072 for each care bed with an interest charge of £102 per bed per week. This roughly amounts to an average of 16% of the weekly cost of a bed, leaving little for staff and front-line services. Staff are poorly paid, which is one reason there is high turnover. They cannot provide the promised levels of service. Too many private equity-owned care homes, especially those owned by HC-One, are regularly sanctioned by the regulator for failing to meet the minimum standards.

At the time of its collapse in 2011, Southern Cross was owned by a private equity firm called Blackstone. Many of its care homes were sold to Four Seasons Health Care, another private equity-owned firm—this time, owned by a company based in Guernsey. In 2017, with 220 care homes and 17,000 residents, it became bankrupt because it had extracted high returns and did not provide the required level of service. Again, it made billions in profit.

In the time available, I have provided a glimpse into some of the predatory practices of private equity. The Bank for International Settlements has now warned that excessive leverage is a danger as private equity firms will struggle to meet the higher borrowing costs imposed by rising interest rates. The Government can of course stop the dangers of high leverage by abolishing the tax relief on interest payments. It is not a business cost. Why on earth is tax relief being given? Whether an investment is funded by equity or debt has absolutely no impact on the systemic or business risk of the project concerned. Therefore, there is no case whatever for allowing tax relief on interest payments by corporations. Tax relief on mortgage interest payments made by individuals was abolished long ago on the grounds that it encouraged excessive borrowing, distorted markets and created new risks. That is even more applicable to private equity entities, which can drag the whole economy down.

I remind noble Lords that the previous financial crash was caused not by people rushing to banks to withdraw their funds but by excessive leverage. Lehman Brothers and Bear Stearns had leverage ratios of 30:1 and 33:1. Private equity has even higher ratios yet we seem to be oblivious to that. There is nothing in the 330-page Financial Services and Markets Bill, published yesterday, to address any of the concerns I have raised. I hope we do not live to regret that. I beg to move.

My Lords, I congratulate my noble friend Lord Sikka on securing the time for this debate, although that timing, as the last business before the Summer Recess, has led to a group of speakers which, in the words of Private Eye, might be described as very small but perfectly formed, if that is not too self-congratulatory. The absence of any speaker form the Conservative Bank Benches would suggest either that the gameshow excitement of the past two weeks has been too much for them or they are already queuing to get into one of the 18 hustings between the two candidates to succeed this terminator of Prime Ministers. Either one of whom, I think even my noble friend Lord Sikka would agree, poses even greater economic and social risks than anything that could be caused by private equity.

My noble friend has spoken and written extensively over the years about his concerns about private equity’s impact on the economy and society, and in his speech today he has laid out these concerns very clearly. As will become clear from my remarks, I see private equity as a glass at least half full in its economic and social impact as opposed to my noble friend’s glass at least half empty. None the less, I am very grateful for the opportunity that he has given the House to consider this important subject.

I declare my interest as a trustee and investment committee member of the Esmée Fairbairn Foundation, which has substantial investments in private equity funds where I have no personal financial benefit; and as an investor through my personal pension fund in the private equity fund of funds, HarbourVest Global Private Equity, where I obviously have a personal benefit.

The experience of the Esmée Fairbairn Foundation, one of the largest grant-making foundations in the UK, represents a microcosm of some of the benefits from private equity investment. Over 15 years, these investments have become the most important contributor to the foundation’s investment performance and hence to its ability to increase its grant-making by many millions of pounds more per year than would otherwise have been the case. The same is true, I believe, for the Wellcome Trust, whose genuinely world-leading work in medical research and healthcare has grown hugely off the back of its private equity returns.

Analysis by the leading investment advisory firm in this field, Cambridge Associates, suggests that there is a strong correlation between the overall investment performance of major US endowments and foundations and the allocation of 15% or more of their investments to private equity. Globally, academic research; improving access, diversity and inclusion in higher education; disease eradication; poverty alleviation; and many other causes are benefiting by billions of dollars a year from the superior returns achieved by successful private equity investment programmes. The same is true to a more limited extent to members of those pension schemes able and willing to invest in private equity.

Of course, none of this would be acceptable if these were returns at the unacceptable expense of employees, consumers or the environment and that is clearly my noble friend’s concern. Private equity as a generic term covers, as my noble friend might see it, a multitude of sins or, in my more nerdishly neutral way, a multitude of sub-asset classes. According to alternative asset data provider Preqin, globally, there are around $3 trillion of assets invested in or committed to buyout funds, on which my noble friend has focused his analysis and remarks.

However, almost as much—around £2.8 trillion—is invested in venture and growth capital, through which start-up, early-stage and fast-growing companies are supported. In these cases, little or no debt is used, so there is not the leverage risk that might apply to buyouts, to which my noble friend referred. These fast-growing, innovative companies are important generators of jobs and, through their products and services, benefit both consumers and enterprises.

Although the adoption of formal environmental, social and governance—ESG—policies by private equity managers is growing fast, with over 40% now having done so, even those venture and growth capital managers that have not yet done so are, through their focus on innovation and the industries and markets of the future, delivering higher levels of impact than, say, a typical public markets equity fund.

That is not to say that there are no issues for this key segment of the private equity market. For instance, a life sciences venture capital fund may take a transformative new drug or therapy from the earliest preclinical stage all the way to licensing or selling it—a pinnacle of high-impact investing, in my view. This does not guarantee that it will be made available to healthcare systems around the world at an affordable price. I suggest, however, that this is a broader issue than that of the role of venture capital or private equity.

Even when looking at the activities of buyout firms, as my noble friend has done, my feeling is that in many cases the issues are more general to the overall corporate sector than specific to private equity. Employment rights, pension protection, thin capitalisation, insolvency law, competition and merger policy are all areas where significant improvements are needed in corporate law and regulation, to which private equity and private equity-backed companies must adhere.

In thinking about insolvency law, I was interested to read the ruling of an Appeal Court judge:

“I have long thought … that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding-up. But that is not the law at present … winding-up debenture-holders generally step in and sweep off everything; and a great scandal it is.”

Those were the words of Lord Macnaghten in the case of Salomon v Salomon in 1897 and, 125 years later, not much has changed regarding the rights of unsecured and trade creditors.

My noble friend raised a number of specific issues about private equity. While it is for the Minister to address them, I would like to express a view on a few of them. I do not believe that there is a real systemic risk arising from private equity. The degree of leverage of the investment banks in 2008 and the issue of subprime mortgages and mortgage-backed securities are of a different scale from anything that currently exists in leveraged buyouts. I look forward to talking to my noble friend outside the Chamber, but do not understand his analysis that private equity is leveraged 30 times. The average leverage applied to companies acquired by private equity firms is somewhere between six and eight times the EBITDA of those companies.

I was struck by the companies he listed in his example. Many of them seem to come from sectors, whether airlines or retail, that are clearly going through major challenges in the current changing consumer environment. I accept that there may be cases where private equity firms’ behaviour exacerbated those problems, but in other cases I believe there are retail businesses, for instance, that have been given more chances than might otherwise have been the case by the willingness of specialist private equity firms and restructuring funds to attempt to turn those businesses around.

Yes, sometimes private equity funds may make a relatively quick gain. That may be through asset stripping —which I think is very much less of a practice than it was 20 or 30 years ago—but in general one of the positive aspects of private equity is an ability for private equity funds to take a longer-term view than investment managers in the public markets can.

In conclusion, I believe that, as in every area of the social market economy, improvements could be made to regulation and practice in the private equity and particularly buyout markets, but overall they make a positive net impact to both the UK and global economies and contribute to employment and improving the lives of many members of society.

My Lords, I congratulate my noble friend Lord Sikka on securing this debate; I am also grateful to the other speaker in this discussion. Given the imminent arrival of the Recess, the group is small, but several interesting points have been made and important questions posed.

Like it or not, private equity is part of our economy. It is an umbrella term, but each fund is different and each transaction unique; we should bear that in mind. Nevertheless, as the Lords Library briefing on this debate highlights, opinion on the role of private equity is split. Some work, mainly in the field of academia, has been done to assess its impact, but the evidence base is not extensive. There are competing views about the sustainability of the increased company debt, the extent to which these funds create jobs or improve pay, and so on. It seems to me therefore that one of the tasks we face is to better understand and quantify some of the practices discussed this afternoon. I hope the Treasury and others are working to expand the evidence base and come to more concrete views. Perhaps the Minister can touch on that in her reply.

One of the areas covered by my noble friend in his remarks was the role of the Financial Conduct Authority, the FCA, in regulating the activity of relevant funds. Over the years we have had many debates on the FCA, its powers and performance. It fulfils some of its functions very effectively, but some have a nagging feeling that it lacks certain tools and fails to properly utilise others.

My noble friend will know that in recent weeks I have tried—somewhat unsuccessfully, I concede—to tease out details of the forthcoming Financial Services and Markets Bill. I believe that the Bill has now been published and that consideration will begin in another place following the Summer Recess. In fact, I know it has been published since I have a copy, and I realise that first you have to weigh it to get a sense of its depth. I appreciate that the Minister may not be able to go into detail about the Bill at this stage. However, she can expect my noble friend to be able to pursue some of these issues further through amendments to that Bill.

That legislation will of course be considered immediately after the Conservative leadership race, which has highlighted something of an obsession with deregulation. While that may be expected, given the personalities involved, surely the answer to questions about the role or potential risks of private equity is to regulate this area in a smarter way? Part of that better regulation could be to close some of the tax loopholes exploited by private equity firms. As has been mentioned, the carried interest loophole is particularly controversial. Many also perceive an incentive for funds to take on debt rather than making equity investments. Labour has committed to closing some of these loopholes, using the process to fund an expansion in mental health care. It took some time, but the Treasury did eventually come round to Labour’s proposals for a windfall tax on energy profits. Can I perhaps tempt the Minister to take on this plan, too?

Another oft-cited concern with private equity has been its interest in established British businesses. We have recently seen the acquisition of Morrisons by a US firm, for example. In recent months, the high-street chemist Boots has been seeking a buyer, with several private equity firms expressing an interest. Ultimately, potential buyers struggled to raise funds and that sale has been abandoned—for now. However, we can be sure that funds will continue to show an interest in large British firms.

With that in mind, what consideration have the Government given to introducing enhanced takeover tests when UK firms of a certain size find themselves the target of a takeover? Ministers often cite the ability to scrutinise or block deals under the National Security and Investment Act, but those provisions do not seem to be sufficient. “National security” is not properly defined in that Act. It is for the Secretary of State to decide what it means, and it is also their decision whether to issue a call-in notice. The Minister may not think there are any issues here, but the Government should at least be willing to outline their position.

It is not just so-called traditional businesses that are targeted by private equity; overseas investment funds also have an increasing interest in British sports clubs. Several private equity firms have been involved in takeovers of football clubs, particularly—but not exclusively—in the Premier League. Just a month ago, the multi-billion-pound sale of Chelsea Football Club was completed, enabling the exit of Roman Abramovich. That consortium was fronted by California-based firm Clearlake Capital. We hope that such deals will ultimately prove to be good for the clubs involved, and for British football, but recent history creates some doubt. There are numerous examples of clubs which have been taken over by private equity or venture capital funds, who load the club with debt and leave others to pick up the pieces. This is one of the reasons why the Government commissioned Tracey Crouch’s Fan-Led Review of Football Governance, and why we will soon have an independent regulator with powers to investigate takeover bids.

However, it is not just sport. As others have noted, we see increasing private equity involvement in our social care sector. While the Department of Health and Social Care insists that this is not impacting on care quality, those who work in the sector speak of pressure on wages and resources, with owners of some facilities seeking to maximise their profit margin. There are genuine fears about what this will mean in the future, given the growth in demand for care services and the issues around staffing. The Government have repeatedly promised social care reform but, as in so many other areas, we have not seen meaningful progress. Private equity ownership of care homes need not be a bad thing if core regulatory requirements protect the quality of service, but it is not clear that current rules are up to scratch.

Elsewhere last year, Parliament passed the Advanced Research and Invention Agency Act, formally setting up a body of that name to invest in high-risk but potentially high-reward projects. During the passage of that Bill, Labour suggested that ARIA should be able to take an equity stake in the ventures that it funds or have a share of the intellectual property developed by those businesses. Those amendments were pursued by my noble friend Lord Browne of Ladyton out of a fear that venture capital firms, probably based in America, would swoop in and buy out any British start-ups that showed promise, moving IP and jobs across the Atlantic. The Government were not able to answer why they felt it right that these start-ups would be taxpayer-funded while their eventual success would be enjoyed by private investors. Does the Minister believe that is a sustainable position?

Despite the concerns that I have raised today, the involvement of private equity in the British economy is not inherently bad. It is a way for some firms to raise much-needed funds, enabling expansion or any number of other desirable outcomes. However, as the debate title suggests, there are risks. Too often we see firms that are operating entirely successfully taken over by private equity, overleveraged and ultimately left in a less stable position. That is not good news for our economy, nor for those who have given years of loyal service to a business. We should not discount the role that investment funds can play but we must ensure that this activity is adequately regulated. I hope the Minister can demonstrate a commitment to that in her response.

My Lords, I congratulate the noble Lord, Lord Sikka, on securing this debate. Private equity is a salient issue for the UK economy, and it is important for us to recognise both the benefits that private equity investment can bring and the risks that can occur alongside it. I thank the other two noble Lords for their constructive contributions to the debate.

I will politely disagree with the noble Viscount, Lord Chandos, on his remarks about the Conservative Benches. I look to the Cross Benches and the Liberal Democrat Benches; even our Green representative is not here. I agree with the noble Lord, Lord Tunnicliffe, that attendance tonight probably has more to do with the timing of the debate than other events going on at this moment. However, I welcome the noble Viscount’s glass-half-full attitude to private equity investment.

The UK is proud to be home to businesses of all shapes and sizes, in every region of the country, and across a variety of sectors. Each of those companies will require different growth strategies for their business that reflect their individual strengths. Private equity plays a valuable role in providing companies with the capital to achieve that. It can also help to ensure that innovative companies are able to weather disruption and continue their long-term growth trajectory to reach their full potential.

Private equity can unlock funding for firms that would not be able to easily access public markets, a vital source of support for both early-stage businesses and businesses that are struggling temporarily, and can enable them to grow into thriving firms. In 2021, businesses backed by private equity and venture capital directly contributed £102 billion to the UK economy, representing 5% of UK GDP. As firms thrive, that benefits the British people both as consumers and as employees of these firms. On jobs, private equity-backed businesses employed 1.9 million workers last year, meaning that 6% of the total jobs in the UK are supported by private equity-backed businesses.

The Government recognise the risks that can come with this form of financing. Private equity has a responsibility to represent the long-term interests of the businesses in which they invest. When mismanagement of a business occurs, it is important that those in the business’s senior management can be held accountable. In order to ensure that this can happen, directors of UK companies owned by private equity firms are subject to the same duties and obligations as other directors. They must comply with the duty to promote the success of their company in Section 172 of the Companies Act. They must exercise reasonable care, skill, diligence and independent judgment, and they must comply with insolvency law. To ensure that any payments to shareholders are legal and sustainable, any dividends and other distributions to shareholders of these companies can be made only out of realised profits.

The argument is that there are all these laws to protect everybody. Has any action been taken against any private equity firms for disobeying any of these laws?

I will have to check that point for the noble Lord and get back to him in writing. From memory, action has been taken but I would want to check whether it was specifically against private equity companies or private equity-backed companies, rather than more broadly. I will also acknowledge, later in my speech, that there are instances where the laws and regulations have not always worked well, and where there is more progress to be made, such as in our audit reforms.

In addition, many private equity firms have voluntarily taken action to improve their disclosures by signing up to Sir David Walker’s Guidelines for Disclosure and Transparency in Private Equity. Private equity-backed companies above a certain size that volunteer to sign up to these guidelines agree to disclose information comparable to that published by listed companies in the FTSE 250. These regulations and guidance aim to ensure that private equity firms’ involvement in UK companies is in the best interests of the company and its employees in the long term. To further support this, the Government have reviewed the legislation on limited partnerships and intend to introduce measures in this parliamentary Session that will increase the transparency of the ownership and activities of these structures.

Transparency is important, and it is vital that investors and all those who depend on the largest companies can rely on the information they publish. That is why the Government are taking further action in this area, which aims to protect the UK economy against risks to jobs, pensions and suppliers from unexpected company collapses. Under the Government’s recently announced audit and corporate governance reform plans, the definition of a public interest entity will be expanded to cover virtually all types of company with a turnover of more than £750 million and more than 750 employees. This means that large private equity-owned companies will be subject to enhanced disclosure obligations relating to resilience and other matters. They will also be subject to stronger audit rules and the new, strengthened regulator will have powers to sanction directors for breaches of duties relating to reporting and audit.

As a result of these audit and corporate governance reforms, private equity-backed firms will have to publish information about the risks they face and the steps they have taken to prevent fraud, and disclose their realised profits and losses which are the basis for dividend payments. The Government recognise that instances of asset stripping do occur, to the detriment of creditors, employees and wider stakeholders. That is why, in 2018, the Government committed to delivering new powers to better enable insolvency practitioners to reverse transactions that have unfairly extracted value from companies prior to formal insolvency proceedings. The Government’s reforms will enhance the transparency requirements for our largest companies as well as the tools our insolvency practitioners can access. This is designed to ensure that large UK firms will not be able to dish out dividends when they are on the brink of collapse.

To address the point made by the noble Viscount, Lord Chandos, about the creditor hierarchy for small traders, the hierarchy that currently exist in insolvency law—

My Lords, the Minister has referred a number of times to distributable profits. A distributable profit can be calculated only if there is a notion of capital maintenance in financial reporting. There is no clear notion of financial reporting in international accounting standards. It is a mishmash of maintenance, money capital, real capital, physical capital—any number can be dreamed up.

In addition, we do not have a central enforcer of company law in this country at all. A number of companies have paid their dividends illegally. In yesteryears, I asked questions, and I persuaded some Members of this House and the other place to ask questions as well, about this. The Government were unable to name where the buck stops. Who exactly is responsible for enforcing the part of company law relating to distributable profits and payment of legal dividends?

The noble Lord is right that different aspects of our company law regulation and financial services regulation belong to different regulators. The point I was trying to make to noble Lords was that the extended and enhanced obligations that public companies currently face will be extended to those large companies in private ownership. That will enhance the transparency and regulation that they are subject to and, although it does not change those existing regulations, I hope that will none the less be welcomed.

I was talking about the creditor hierarchy, which has been well established for many years and is common among most international jurisdictions. Promoting the ranking of one group of creditors will mean that other creditors get less, and it would impact the positive environment that the UK economy creates for lending to business. With that in mind, any proposed change to the creditor hierarchy should only ever be considered with the utmost care.

I understand noble Lords’ concerns about recent high-profile cases where significant losses have occurred to creditors such as employees or small traders, including cases where the taxpayer has had to fund the continuation of vital services and where losses may have resulted from misconduct by the directors of those companies. I hope noble Lords will understand that it is not appropriate or helpful for me to refer publicly to individual cases, some of which may still be under investigation by various regulators or investigatory bodies, or where proceedings may be under way or in contemplation. However, I reassure noble Lords that the Government keep the insolvency and corporate governance frameworks under constant review. This includes learning lessons from such cases and, where necessary, the Government will take action to improve or strengthen those regulatory frameworks.

The noble Lords, Lord Sikka and Lord Tunnicliffe, both raised concerns about the evidence base for private equity’s impact on our economy, specifically in relation to risks to financial stability. I agree with them on the importance of evidence and note that the Financial Policy Committee is responsible for identifying, monitoring and taking action to address systemic risks to UK financial stability. The FPC achieves this, in part, via the identification and assessment of risks and stresses in its biannual Financial Stability Report, published most recently on 5 July.

Both noble Lords also mentioned the Financial Services and Markets Bill. The noble Lord, Lord Tunnicliffe, is right about its heft and, without going into detail, I am sure the Government will welcome noble Lords’ scrutiny of the Bill when it comes to this House. They will have the opportunity to table amendments in the usual way, but perhaps I can provide some words of reassurance to your Lordships on that Bill. It aims to make the UK one of the most competitive places in the world to do financial services business. However, I think the noble Lord talked about better regulation rather than deregulation; that is the spirit and aim with which the Bill is being taken forward, and the UK has a strong record in delivering that.

Both noble Lords also raised concerns about carried interest and the tax treatment of debt compared to equity. The Government believe that the UK’s approach to the taxation of carried interest, which is comparable to that of other jurisdictions, strikes an appropriate balance. The existing rules reflect both the nature of carried interest as a reward and the importance of maintaining the UK’s competitiveness for fund management.

As with other costs in relation to debt versus equity, debt interest is generally deductible as a business expense. Again, the UK is not an outlier in allowing groups to deduct interest in the calculation of taxable profits. Meanwhile, the UK has wide-ranging interest restriction rules that ensure highly leveraged groups deduct only a proportion of their worldwide third-party net interest expenses, equal to the UK’s share of the group’s worldwide profits. There are many reasons, other than the tax deductibility of interest, why companies may favour debt over equity financing. These include lower costs, easier access, greater flexibility and non-dilution of capital.

Noble Lords asked about takeover powers and what consideration the Government have given to enhanced takeover tests for large companies. As an open economy, overall we welcome foreign trade and investment where it supports UK growth and jobs and meets our stringent legal and regulatory requirements. The details of mergers and acquisitions are primarily a commercial matter for the parties concerned. However, the Government acknowledge that there are instances where such transactions might result in concerns for consumers and the economy more broadly. That is why there are established processes for considering whether there are specific public interest reasons for Ministers to intervene in mergers under the Enterprise Act 2002. These are limited to matters relating to financial stability, media plurality and public health emergencies.

The National Security and Investment Act 2021, which came into force in full in January 2022, introduced mandatory notification and clearance requirements for certain acquisitions in 17 sectors of the economy, including parts of the UK’s critical national infrastructure and advanced technology sectors. This brought further improved security to British businesses and people.

I am conscious of the time, but I have one more point to address. The noble Lords, Lord Sikka and Lord Tunnicliffe, mentioned the establishment of ARIA. Earlier this week, the Business Secretary appointed the new CEO and chair of ARIA. These appointments will now drive forward the final steps in setting up the agency, ensuring it is best placed to fulfil its objectives of enabling exceptional scientists and researchers to identify and fund transformational research that leads to new technologies, discoveries, products and services. As part of finalising the set-up, careful consideration will be given to the most effective funding mechanisms for the agency to have at its disposal.

I close by praising the support that private equity provides to UK businesses and agreeing with the noble Lord, Lord Sikka, that we must be conscious of the economic and social risks that can arise. I emphasise that the Government understand the consequences that can arise from malpractice in private equity. The ongoing reforms and regulation involving private equity-backed businesses, alongside the upcoming audit and insolvency reforms, are designed to address these issues. In doing so, we will work to ensure that the UK economy continues to be open, competitive and above all fair to those whose jobs and livelihoods depend on it.

I thank noble Lords for a very interesting debate. Although we had relatively few speakers, the quality of comments presented by all noble Lords was very high. I am especially grateful to the Minister, who has had a very long day today; I am sure she is looking forward to the end of it, so I will not hold her for too long.

It was said that private equity earns “superior” returns. As noble Lords who are familiar with efficient market hypotheses will know, if markets are efficient, there can be no such thing as a superior return; there may be a higher return, but that is something entirely different. Private equity has frequently secured this with low wages—as evidenced by Bernard Matthews, Debenhams, Maplin and care homes—and uses tax avoidance techniques ferociously and seems to get away with it. It is subsidised by the tax system. However, it was only in the early 20th century that the tax relief on interest payments began to be given; before that the courts had specifically refused that it was a cost. The change was due to lobbying by the finance industry, which obviously then makes money by asset stripping, examples of which I gave previously. On private equity, we all welcome the investment, jobs and business rescues, but the downside risks are too high.

As I have already referred to, the US regulators have recently expressed grave concerns about the operation of pyramid schemes and Ponzi schemes, but we have not heard anything from the UK regulators about what they are going to do. I believe that the SEC in the US is looking at it.

The Minister referred to transparency, but I do not see transparency in the accounts of private equity companies. One reason for this is that the entity at the apex is in a tax haven, and you cannot see the accounts or any details about them. The entities underneath do not provide full details of the corporate structures in which they are enmeshed. They will tell you what the immediate parent company is, but this is just one cog in a giant wheel. Therefore, it becomes very difficult to see any transparency.

The Minister also referred to the audit Bill. From what I have seen, I do not have any faith in it, but we will leave that for debate on another day.

I thank all noble Lords for staying behind and wish them a very happy and relaxing summer.

Motion agreed.

House adjourned at 6.16 pm.