Private equity groups will continue their raid on UK plc unless there is a sweeping reform of City rules to lighten the load on public companies, according to the chief executive of one of Britain’s largest asset managers.
“Is it a raid? It’s certainly evident that it’s happening,” said Peter Harrison, chief executive of Schroders, adding that it was an “inevitable consequence” of the UK’s governance regime and of the tax deductibility of debt.
In the first half of this year private equity firms announced bids for UK-listed companies at the fastest pace in more than two decades, taking advantage of depressed valuations as a result of Brexit and the pandemic.
On Saturday a trio of private investment groups led by SoftBank-owned Fortress announced a £9.5bn deal to acquire Wm Morrison, Britain’s fourth-largest supermarket chain.
Meanwhile, New York-based Clayton, Dubilier & Rice, which made an unsolicited takeover offer for Morrisons that was rejected last month, has also bid for London-listed healthcare group UDG Healthcare. US private equity group Blackstone has swooped on British logistics and housing developer St Modwen Properties.
Harrison said the UK governance code was “written at the expense of public companies” and could be “very onerous” on them, pointing at everything from disclosure requirements to remuneration rules.
The boss of the £574bn asset manager said there were also other factors at play. “The incentive structures in the [fund management] industry don’t support long-term thinking,” he said, echoing similar sentiments expressed by Baillie Gifford star manager James Anderson.
Harrison said the focus must be on both improving the quality of listed companies in the UK and giving investors access to non-quoted opportunities.
He applauded a government-backed review, which called for an overhaul of listing rules, including the introduction of dual-class shares favoured by entrepreneurs, so that London could better compete with New York.
He noted that regulators were also currently looking at changes to UK fund rules to help offer retail investors access to less liquid assets such as private equity, private debt, real estate and infrastructure.
“We’ve got to keep up the work to democratise private markets more for savers,” said Harrison. “We’ve got to get them to default away from just buying a UK index and we have to improve the UK index.”
Last month Schroders combined all of its private markets activities under the newly formed Schroders Capital, which runs $65bn. Harrison said that the group was “pretty agnostic” as to how it packaged its investment skills: “Ultimately, we’ve got to grow the wealth of our customers. The move towards private assets is a reflection of the fact that that’s where the puck is going.”
He was speaking as Schroders and Oxford Sciences Innovation, an early-stage venture capital firm, announced that they had bought a minority stake in Natural Capital Research, a research organisation.
The term natural capital first came into use during the 1970s and applies to the stock of renewable and non-renewable natural resources such as carbon, water, soils, species, communities, habitats and landscapes.
NCR uses scientific research to help its clients develop ESG, biodiversity and net-zero carbon strategies. “Viewing nature as an asset and putting it on the same balance sheet as a company’s other resources is no longer seen as an oddity,” said Kathy Willis, director of NCR.
Harrison said: “The opportunity is far bigger than this transaction implies because it’s making a statement about natural capital as an asset. Until it’s measured, no one will pay attention. But what gets measured gets managed.”
He added: “We all know the value of Amazon but no one knows the value of the Amazon. The analysis that NCR does allows that to happen.” The financial terms of the deal were not disclosed.