Why have we let the private equity wide boys run riot with our economy?

I was shocked when attending a major business conference recently to be told that the bankers now running the City have no recollection of the banking crash and the credit crunch, which started only 16 years ago.

But then post-graduates with excellent degrees and MBAs probably reach the top echelon in their mid to late 30s. Some will have retired long before that with enough money to keep them very comfortable for life.

The old boys who crashed the banking system and almost the world’s whole economy were in their late 30s to early 50s and they have been long gone.

But regulators should know better. If they do not have a huge collective memory, vast experience and constant reminders of what goes wrong when they take their eyes off the ball; then there is no hope.

Which is why two recent headlines in the Financial Times make me worried.

The Treasury has started to look at the private equity industry and has found that in 2022, some 3,000 private equity bosses shared £5bn. They started to research the area after the Labour Party said it would tax those gains at a higher rate, at the moment they are treated as capital gains.

Then the FT reported that the Bank of England is looking at how is UK businesses would be hit by the reversal of a long-running private equity boom. The Bank has also increased its warnings about the sector’s leverage, transparency and valuations. How much they borrow, what they are really doing and what they are really worth, in layman’s terms.

The link is obvious, private equity firms are making their owners millionaires by borrowing billions, buying perfectly viable companies, loading them with the debt, asset-stripping them and then selling them on.

The problem is manageable if it only happens occasionally but when swathes of different sectors are loaded down with debt and low profits it is a real problem. Now with higher interest rates some of the private equity funds themselves are in trouble.

Their cost of borrowing has soared, and the British economy is flatlining.

But why has it taken the Bank of England so long to spot this was happening? Private equity has been around for years.

It is where the bright young things go to make their millions quickly. It has loaded industry with debt, at a time of high interest rates. It is poorly regulated and poorly taxed.

Suddenly borrowing huge amounts to buy boring businesses is not looking so clever. But it would not have come to this if the authorities had clamped down on this years ago.

When it comes to the economy the Bank of England likes to boast that its job is “to take away the punch bowl just when the party is getting going”. But when it comes to the City, they never do.

If our wages rise too fast they do, if inflation rises too much they do, if the whole economy grows too quickly they do.

But when a few City wide boys fill their boots they don’t; not until the problem is so big it poses a possible risk to the wider economy.

Meanwhile the individuals involved have walked off with billions perfectly legally, and left others to clean up their mess. Just like the bankers during the credit crunch, they will get to keep every penny.

Warning about a possible systemic risk now means that the regulators have acted too late, it is a sign of failure. The regulators, like the bankers, have forgotten the history lessons from just 16 years ago.

We can afford it if the regulated forget their history, just so long as the regulators don’t. But we can’t afford it if they both do.

You can read more from Jonty on Substack at Jonty’s Jottings