Lord Monks
To ask His Majesty’s Government what assessment they have made of the role of private equity in the UK economy.
Lord Monks (Lab)
My Lords, I am grateful for this opportunity to revisit one of the darker corners of the financial services sector and to see what has altered since noble Lords last debated the issue in 2022. The excellent Library brief defines private equity as “a managed fund”, aiming to secure “a controlling share” of established companies, then, after a few years, to sell the companies on at a profit. The funds typically aim to sweat the assets as one of the ways of increasing profits. By sweat I mean sales of property, reductions in staff and sometimes their pay, cutting back on investment in new products and services, sometimes reducing maintenance and using the high debt involved to reduce tax. Growing the business is a stated aim but often turns out to be a second-order objective.
In addition, fund managers secure their remuneration by aiming for a share of the profits—often around 20%—and by interest payments and dividends. These are taxed at a lower rate than the higher rate of top income tax. Compensation arrangements are complex, but PE takes full advantage of what is known in the City as the carried interest loophole and sometimes as Wall Street’s favourite tax break. The rewards at the top often contrast with the meagre rewards for the staff in PE companies.
In the union world, we became aware in the mid-2000s of hostile buyouts fuelled by PE. They were associated with job losses, depressed wage growth and union derecognition in some cases. We learned that company managers we dealt with no longer had the same authority and decision-making power. The PE fund was the boss, and the employees were often demoralised.
The British Private Equity and Venture Capital Association responded to concerns by setting up a standards-setting exercise involving Sir David Walker and later established a PE reporting group on which my noble friend Lady Drake serves. This was welcome, but concerns remain. I confess that when the banking crisis broke in 2008-09, my first thought was that highly leveraged private equity and its cousin hedge funds were major factors in it. I was wrong. The explosion was triggered on subprime mortgage markets. The question still in my mind is that private equity and its high leveraging could cause a massive problem with instability and company failure.
Things have moved on since the mid-2000s, but there are signs of a revival in PE. According to the FT just 10 days ago, there is developing in Germany in particular an impetus for major household-name companies—I will point out just one: Volkswagen—to sell off non-core divisions to PE, which would do the dirty work of asset sales including job reduction. The tax deductibility of interest payments on debt creates an incentive for PE funds and others to borrow to buy, even though the Finance Act 2017 restricted some activities in this area. One of the criticisms made of Unilever in the context of a takeover bid by Kraft was that its balance sheet was insufficiently leveraged. Unilever is over 90 years old. Will any PE-fuelled companies endure and prosper like that?
Anyone who has looked at the history of PE will have seen some of the horror stories. My noble friend Lord Sikka mentioned some of these in the debate in 2022. I just pick out one: Toys R Us was a well-known retailer in the US and the UK. It was taken over by Bain Capital and Kohlberg Kravis Roberts, stellar names in the PE world. Staff and benefits were cut, and interest expenses consumed 97% of the company’s operating profits. The company was still paying interest on loans to KKR and Bain until 2016; it is small wonder that it collapsed.
Currently, I am particularly concerned about PE operations in the social care sector. According to the Guardian on 12 November:
“Private companies operating … in … three regions of England have taken more than £250m in profits in three years”
from their social care activities,
“with more than a third going to … private equity firms or companies based in tax havens”.
This is a lot of public money going astray. I think that PE should not be allowed anywhere near social care.
I could go on with other examples of poor behaviour, but it would be more interesting to hear advocates of PE listing positive examples where, as a result of the actions of PE, companies have been transformed from laggards to dynamic and sturdy firms. Do any such examples exist? Where are the successful poster boys for private equity?
I recognise that private equity is a substantial part of the UK economy. It is too big to ignore. The Governor of the Bank of England, Andew Bailey, has recently announced that the Bank is planning to run a series of tests of private equity and credit firms. This follows some problems in the United States. The governor is seeking to discover whether these are isolated examples or, as he put it, a “canary in the coalmine” indicating wider systemic problems. This is important work by the Bank.
I appreciate that the Government are desperate to boost growth and seek new investment, especially on necessary infrastructure improvements. They are always looking for new sources of capital, but is private equity contributing or is it undermining traditional ways of investing in business, such as issuing new equity?
Do the Government have any current concerns about the role of private equity? Do they see any need for further regulation for PE or, more widely, the shadow banking sector? Are there plans to remove the tax advantages of debt relative to equity? Where are we on the Government’s aims to tackle the injustices of carried interest? This is an area that needs considerable scrutiny, and I hope that this short debate can help stimulate that further scrutiny.
Baroness Stedman-Scott (Con)
My Lords, I will speak on the role of private equity within the modern pensions landscape and, in particular, the implications of the Government’s Mansion House reforms for the Local Government Pension Scheme and long-term investment in the United Kingdom. The reforms announced in 2024 mark an important moment. They aim to consolidate our fragmented defined contribution sector and strengthen the investment management of the Local Government Pension Scheme. Taken together, they represent an attempt to align pension outcomes with the broader goal of promoting productive investment across the country.
The challenges of the next half-century are considerable: climate transition, energy security, technological change, demographic pressures and geopolitical instability will all shape the environment in which pension assets must be managed. In that context, private capital, including private equity, has a role to play not only in delivering returns but in addressing some of the systemic issues that confront the country.
It is important to acknowledge that private equity is not a uniform asset class. When approached with discipline and proper governance, it can generate significant value. Over the past two decades, it has produced sustained double-digit returns, considerably outperforming public equity indices. For many defined contribution schemes, which seek long-term growth and diversification, such returns are both attractive and aligned with members’ interests.
Private equity also provides access to parts of the economy that public markets do not easily reach: smaller companies, specialised sectors and innovative enterprises. It enables long-term investment in businesses without the short-term pressures that arise in listed markets, and it brings with it an attractive investment approach, drawing on skills that help transform businesses and support growth. Other jurisdictions demonstrate what can be achieved at scale. Canada’s major pension funds, for example, have used their size to deepen allocations to private equity infrastructure and real estate, generating stronger returns and reducing costs. The United Kingdom should be ambitious in seeking similar outcomes.
This brings me on to the Local Government Pension Scheme. With nearly £400 billion in assets—that figure is projected to reach £1 trillion by 2040—the LGPS is uniquely positioned to contribute in order to improve member outcomes and to increase productive investment across our regions. Encouragingly, we are already seeing progress. The Greater Manchester Pension Fund has committed more than £500 million to SME investment, supporting more than 160 business and creating more than 16,000 jobs. Funds in the West Midlands, South Yorkshire, Avon, Clwyd and Devon are showing similar leadership.
Noble Lords are, I am sure, quite surprised that I should be speaking in this debate on private equity, but I absolutely pay tribute to the Private Equity Foundation. When it makes money, which is a good thing, it actually puts that money into a good cause. The charity that I ran a few years ago was a beneficiary: it invested in the work that we did with children in schools. We reduced truancy, increased academic achievement and got young people into work who would never have done so otherwise. It deserves credit for that.
There are jobs for young people in the areas that need them most. There are opportunities and hope. As of 31 December 2024, £203 million had been invested directly into the West Midlands Combined Authority area. This includes funding for housing, infrastructure, commercial property and small businesses, creating jobs, building homes and improving services. More than 22,000 jobs have been supported, with nearly 5,000 homes delivered and significant investment directed into hospitals, schools and digital infrastructure. Such examples show that institutional rigour can sit comfortably alongside place-sensitive investment strategies. They demonstrate that pension funds can achieve strong financial returns while also contributing to local economic development.
However, context matters. Many LGPS funds are currently well funded. The scheme as a whole was estimated to be 107% funded in March 2022, and early indications suggest a further strengthening by 2025. For some funds, that may reduce their immediate appetite for additional private market exposure. The Government’s proposed allocation target of 10% for private equity may, therefore, appear ambitious. Yet, if the consolidation envisaged by the Mansion House reforms proceeds, the LGPS will inevitably become a larger and more sophisticated investor in private markets.
As this occurs, the secondary market, which is all too often overlooked, will play an increasingly important role. It will provide liquidity, support portfolio rebalancing, and enable the effective recycling of capital. The UK must ensure that this market is deep, transparent and trusted. If we are to meet the challenges of the coming decades and seize the opportunities that accompany them, we must treat our pension system as a cornerstone of national economic strength.
Baroness Moyo (Non-Afl)
My Lords, as I have disclosed in the register of interests, I serve on Oxford University’s endowment investment committee, which allocates capital to private equity. There is always a risk that a debate on the role of private equity will be based on dated views of the industry, characterised by asset stripping, financial engineering and cutting jobs. However, compared with 20 years ago, today’s private equity is largely focused on creating growth through productivity gains driven by operational improvements and technological innovation.
I will make three points about private equity as it relates to the United Kingdom’s prosperity. First, private equity is an engine in the British economy. The British Private Equity & Venture Capital Association estimates that, in 2025, private equity-backed companies employ approximately 2.5 million workers—that is one in 14 of Britain’s working population. The association also estimates that these companies generate nearly £200 billion, or 7% of GDP, for the economy. More widely, when suppliers and related consumers are included, 2023 estimates put private equity’s economic impact at roughly £300 billion, or about 11% of the UK’s GDP.
Secondly, private equity plays an important role in boosting the country’s productivity. The Productivity Institute found that private equity-backed companies benefit from productivity gains that are higher than those in the wider economy. Specifically, the institute notes an increase in total factor productivity of greater than 4%, and an increase in labour productivity as large as 5%. Crucially, the report notes that these gains are unlikely to be the result of cutting jobs. This revelation about productivity alone is key; it should not be overlooked amid concerns around the UK’s persistent productivity puzzle.
Thirdly, private equity must continue to play a vital role in driving innovation. Private equity is not just helping to turn around older, established companies; it is also providing growth capital to help companies scale up, and venture capital to support start-ups. The noble Lord asked for specific examples. I give him the magnificent seven, which are currently powering 200 to 300 basis points of economic growth as we live and breathe.
More specifically, both artificial intelligence and climate efforts, which are critical for future economic success, require large-scale capital investment, which private equity can help to provide. The era of AI in particular promises to drive down costs in public goods and increase efficiency of delivery in things such as the National Health Service. The IEA estimates that the energy transition and climate initiatives are going to require $5 trillion per year globally. Essentially, these efforts need all the capital that we can get, private equity included.
Yet today, in the UK context, private equity faces challenges, including finding a route to sell companies it has invested in and nurtured. This is, in part, due to the UK’s capital markets having weakened and investor interest in IPOs and public markets falling away. Worryingly, this year the United Kingdom has fallen out of the world’s top 20 IPO markets. Additionally, private equity investors are struggling to find promising new UK companies to invest in, highlighting burdensome regulation that ultimately holds back growth and puts the UK at a distinct disadvantage in the global competition for investment capital.
Britain needs more good jobs, more innovation and greater productivity. It also needs more infrastructure and improvements in public services. All of these require vast quantities of large-scale investment. At a time when this country’s growth is slowing—it recorded growth worth just 0.1% of GDP in the last quarter and is registering a 5% unemployment rate—this backdrop is a stark reminder that we must not deter major sources of capital and job creation such as private equity.
To be balanced, there are notable criticisms—some of which have already been mentioned—from local authorities experiencing escalating costs in both child and adult care provision from the private sector, and, in some cases, private equity-owned businesses. Business and the Government must, of course, come together and co-operate to address these urgent concerns. But more generally, government action, be it through legislation or regulation, should aim to create a much more engaging environment for private equity investment opportunity.
Lord Davies of Brixton (Lab)
My Lords, I thank my noble friend Lord Monks for introducing this debate on an important subject and the noble Baronesses, Lady Stedman-Scott and Lady Moyo, for their interesting contributions. They presented a powerful case in favour of private equity, but there is another side to the story. My noble friend Lord Monks explained, as I am sure my noble friend Lord Sikka will, some of the problems created by private equity. I am afraid that I am not as sanguine as the noble Baroness, Lady Moyo, that the bad old days are over. The potential is still there—it has not gone away. It is about the way that this tool is operated. You cannot deny the problems of the past. What guarantee is there that they will not return in the future?
My particular interest in private equity is in the way it has become embroiled in current debates about pension schemes. The Mansion House accord, mentioned by the noble Baroness, Lady Stedman-Scott, seeks to commit pension schemes to invest significant amounts in private equity. In the House of Lords, we will shortly receive the Pension Schemes Bill, which explicitly refers to the need for large pension funds to be able to invest in private equity. It is a very topical issue.
The promise is attractive. We are told that it will lead to higher returns; in introducing the Mansion House accord, the Treasury specifically referred to the higher potential net returns for savers. I suspect there is a significant element of survivor bias in these figures. None the less, the higher returns are not a free lunch; they come with the downside of failure. Private equity investments are not by their nature successful; they require the hard work and knowledge of experienced investors.
We need to identify the problems with private equity in its own terms. My noble friends will point out some of the other problems that have been faced, but one is illiquidity. As pension funds are operated at the moment, any member is entitled to move their money out and take it somewhere else, or to use it to buy an annuity when they get to retirement. Illiquidity, which is inherent in private equity funds, is a problem for pension funds.
Another problem is valuation uncertainty. Pension funds are required to tell their members what the fund is worth. The funds held in private equity are calculated in a way that, at best, we could describe as opaque. Members will be given a figure as to what it is worth, but it is not the same sort of figure as in market investments, where there is a market and you know what the investment would actually raise if you sold it tomorrow. You do not know what your private equity investment will raise if you have to sell it tomorrow.
Then there is the inevitability of higher costs and fees being charged. In some way, that is the point of private equity—so that advisers can charge higher fees, which are inevitable. Finding these splendid investment opportunities, as previous speakers have identified, does not fall into people’s laps. It requires hard work and skill, which comes at a significant cost. Talking about private equity without recognising the costs involved is wrong.
Of course, there is the overall problem of really knowing what these funds are doing. There have been well-attested cases reported in the Financial Times of private equity funds selling their investments to a self-owned subsidiary. This is not uncommon; the sort of financial structures which are developed in order to hold private equities are, at best, obscure, as I said earlier. Then there is the alpha problem, with the Government as a fiduciary in pension funds; it is the trustees who should be taking the decision and not the Government.
Lord Leigh of Hurley (Con)
My Lords, I congratulate the noble Lord, Lord Monks, on securing this very timely and important debate. I declare all sorts of interests. I am a founder and current senior partner of the advisory firm, Cavendish Corporate Finance—I am grateful to the noble Lord, Lord Davies, for his comments on the skill and hard work needed in that area. I personally invest in several venture capital and private equity funds, directly and indirectly, and I often negotiate against, and sometimes for, private equity as a professional M&A adviser.
When I started Cavendish in 1988, PE was a new and unknown phenomenon. A most important breakthrough happened when the Treasury agreed that carried interest should be taxed as capital not income, and there were other legislative changes in the 1980s and 1990s that enabled the industry to flourish. Noble Lords may recall the Chancellor at the time who facilitated this—it was not Lawson or Major; it was, to his credit, Gordon Brown. Those who think this is all a terrible, Thatcher-inspired “Greed is good”-era event are wrong. To be fair, there were lots of other hidden benefits at the time for the PE industry, which successive Governments allowed: an unlimited write-off of interest against profit—which is now capped—with that interest going to tax-free funds; base cost shifting, which has now stopped; very advantageous LLP structures, which the forthcoming hokey-cokey Budget may or may not stop; and offshore benefits, which have now been stopped.
However, at that time, the culmination occurred when an unfortunate PE individual boasted, at a House of Commons Select Committee, that he paid less tax than his cleaner. It was all the above, together with some very aggressive behaviour by some operators, which left PE with a very negative reputation. I recall a meeting of a PE-backed company that was behind budget, and the PE executive demanded that someone was fired as a result. They said they did not care who was fired, they just wanted to see someone fired immediately—and they were. As noble Lords will have gathered, I do not have rose-tinted spectacles when looking at PE. I have seen some bad behaviour and some enormous—I mean: enormous—fortunes made by some who really did not contribute much to our economy.
However, that being said, I make the point that, originally, PE was solving a major issue, as typified by RJR Nabisco, when the barbarians at the gate took over a company run by grossly inefficient management, who treated their corporation as a cash cow for their own private excesses. The point is that the capitalist system is the most successful ever created to enhance all our welfare, and it works on the constant need for greater efficiencies to maximise the return to shareholders for their investment. This is what really matters, not the ESG policy or the mission statement—or its purpose or self-declared interest to do good—or all the other fluffy stuff put up to deflect us. A company needs to be measured and assessed overwhelmingly by its return to shareholders on their investment—that is all. If management need to be sacked, they should be, unlike in other sectors. Of course, exploitative behaviour, modern slavery and cartel-like behaviour all have to be banned, but the overwhelming focus needs to be the efficient return to shareholders on their capital.
That matters to many of us in this Room. It matters not to those on the state pension or state benefits, which they enjoy because of state employment, but to those who, like me, have saved and invested in funds which, in turn, have been allocated to PE investments. We need them to succeed, and they are doing so at a time when public markets are sadly struggling because the Government keep failing to stimulate them—I hope the Minister will say more about that. Private capital is needed more than ever.
PE has helped some 13,000 firms in the UK and this Government, who claim to be focused on growth, have done nothing to encourage it. Indeed, they have brought on the disastrous Employment Rights Bill which every trade representative body and pretty much every private business realises will kill growth.
I turn briefly and more importantly, to venture capital, which the noble Baroness, Lady Moyo, touched on. It does an outstanding job in taking a risk that no one else will. As a result, 40% of the UK’s fastest growing 100 companies in the UK have VC money, with £14 billion in tech companies last year.
Since some of the other horror stories I mentioned earlier, the Walker guidelines, which was briefly mentioned, have been implemented successfully and seem to have changed behaviour, so let us try to ensure that PE companies play by all the rules, that investors feel welcomed in the UK and that we celebrate the sharp and necessary focus PE brings to the UK, ensuring that profitability is maximised for all our benefit.
Baroness Bennett of Manor Castle (GP)
My Lords, in following the noble Lord, Lord Leigh, I have to note that capitalism focused on shareholder returns is dependent entirely on the natural world and a functioning society. There are no shareholder returns on a dead planet or in a collapsed society.
I thank the noble Lord, Lord Monks, for providing this opportunity to assess the enormous and wide-spread damage that private equity has done to the UK and the world, with some $13 trillion now held across 50,000 companies worldwide. Their tentacles spread, particularly for the relatively poor, into every aspect of their lives, being their landlords, their electricity and water providers, their providers of travel to work, their employers, their doctors, their debt collectors and even caring, very expensively, for their pets. It is, as has been described in virological terms, a financial pandemic.
The author Megan Greenwell in her book Bad Company focuses on the US and, as she identifies, the death of the American dream which is associated with private equity. If noble Lords have not read it, I recommend it. She tellingly contrasts venture capital, which seeks to invest money mostly in start-ups to support the development of something new, with private equity, which typically buys company outright—often mature and established companies. The private equity aim is to get money out of the company without really caring whether the company makes any money. They are parasitic.
We all know the ways in which they do this, as the noble Lord, Lord Monks outlined: selling the company’s land and buildings, which are frequently bought through high-interest loans from related companies, then charging the company rent to continue to occupy its own premises. Money not already being drained by the interest payments is pumped out in dividends. Those are the returns that the noble Baroness, Lady Stedman-Scott, referred to. Then we see the buyer slashing the workforce, cutting the quality of services and products and it all crashes and burns in a couple of years, as it has in so many cases. Then the private equity firm moves on to the next victim.
As evidence given recently to our own Public Accounts Committee shows, some of the most vulnerable people in our society are suffering the worst as individuals from this model. The Public Accounts Committee inquiry, launched in July 2025, was prompted by National Audit Office research showing that the cost of children’s residential care placements has risen 96% since 2019. It heard from the Children’s Homes Association, which has removed tax-haven based private equity providers from its membership and called them out, pointing out that there are now large national providers with several hundred placements earning windfall profits from the coffers of local authorities that are then shipped straight off to tax havens.
The chief executive of the Children’s Homes Association told the Public Accounts Committee that measures in the Children’s Wellbeing and Schools Bill will not deal with this situation. He asked,
“is there political will to tackle tax haven-based private equity providers?”
I ask the Minister that question directly and non-rhetorically. Will the Government get private equity out of children’s care, out of aged care and disabled homes, where it has been doing similar damage for decades? These were issues raised by the noble Baroness, Lady Moyo.
My second question to the Minister is about the welfare of us all. We continue to see the enormous price paid by the young, the poor and the disabled after the financial crash of 2007-08, caused by the greed and fraud of the bankers. We are now hearing increasing warnings about the risk of it all happening again from multiple quarters: from the AI-fantasy bubble to the crypto mania, but also from the risk of collapse of the private equity model. There are only so many juicy targets from which money can be sucked, and they are drying up as our economies are hollowed out and financialised, with few sectors not already left victim. As the Bank of England’s Financial Stability Report said last year:
“Vulnerabilities from high leverage, opacity around valuations, variable risk management practices and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors”.
Natacha Postel-Vinay, an assistant professor at the London School of Economics, said in commentary:
“I think a lot of people do not know exactly what is going on”.
Another question for the Minister is whether the Government can say, hand on heart, that they are confident that the regulators, and they themselves, know what is going on in terms of the financial risks being presented by private equity, particularly in light of the obscurity as outlined by the noble Lord, Lord Davies?
I finish on a message of hope, because I am always looking for hope. One of the reasons I recommend Greenwell’s book is that she talks about the people who are fighting back against the damage done by private equity; the workers and communities who are fighting back. My final question to the Minister is what the Government are going to do to fight back and tackle some of the tax issues that have already been raised by other noble Lords. They are, after all, the Government. Surely, the state of the country and the economy is their ultimate responsibility.
Lord Sikka (Lab)
My Lords, it is a pleasure to follow the noble Baroness, Lady Bennett, and I also thank my noble friend Lord Monks for securing this debate. Private equity’s trail of destruction includes Debenhams, Homebase, LloydsPharmacy, Maplin, Poundworld, Silentnight, Toys R Us, The Body Shop, Southern Cross Healthcare and more. High streets have become economic deserts, thousands of SMEs have been strangled and Governments just wring their hands. Private equity is part of shadow banking and remains unregulated. There are no effective rules about leverage or capital adequacy. Governments are playing with fire, as the next crash will surely come from this sector.
Tax abuse, profiteering, asset stripping and cutting staff and wages are the standard private equity tools. The controlling entity is usually in some opaque offshore tax haven: no tax is paid on dividends extracted from UK operations. Instead of share capital, private equity loads companies with secure debt; this enables it to eliminate a downside risk of shareholding as, in the event of liquidation, it is paid first. Unsecured creditors get little or nothing.
Some years ago, I was asked by the Work and Pensions Committee to look at the liquidation of Bernard Matthews, a well-known poultry company. It was deliberately gutted by private-equity owners: the directors sold the assets and jettisoned all the liabilities, including deficit on the employee pension scheme, to maximise profit. Suppliers, SMEs, employees, local communities and HMRC were harmed. Governments did absolutely nothing. Can the Minister say how many SMEs have been damaged by private equity, and will the Government investigate liquidations concocted by private equity?
The crisis at Thames Water has been deepened by private equity’s cash extraction. Northumbrian Water, Southern Water, Wessex Water and Yorkshire Water are partly or wholly owned by private equity. All have hundreds of criminal convictions and are still allowed to fleece customers. Private equity is devouring ASDA and Morrisons: staffing and wages have been cut to boost profits and investment has been neglected. Large corporations, many controlled by private equity, have 60% of the veterinary market. Vets’ fees have increased at double the rate of inflation. Vets are under pressure to meet financial targets and sell unnecessary appointments to pet owners—that is what vets have told me.
Profit margins range between 16% and 20%. Social care is mainly under the control of companies increasingly backed by private equity. They are extracting £1.5 billion a year for their investors. Private equity-backed fostering agencies provide almost one-quarter of all child fostering places in England. In 2023, the parent company of the UK’s biggest provider, the National Fostering Group, made an underlying profit of £104 million with a profit margin of 21%. That is unacceptable. Profiteering from vulnerable children is what private equity does. Despite the glossy statement, it has no notion of ethics or social responsibility. On 18 November 2024, the Government issued a press release entitled Biggest Overhaul in a Generation to Children’s Social Care. It stated:
“We will crack down on care providers making excessive profit”
and
“put a limit on the profit providers can make”.
A year later, nothing has been heard. Can the Minister tell the Committee when this legislation will be brought to Parliament?
Too many dental practices are taken over by private equity as it seeks to build local monopolies. My dentists—PortmanDentex and Rodericks—are leading players and are controlled by opaque entities from Luxembourg and the Cayman Islands. They are not there for the sunshine. The typical cost of dental treatment at these dental surgeries is three and a half times what NHS dentists charge.
Too many GP surgeries are controlled by private equity. There are pressures on them to increase profit by cutting staff and using unqualified staff. The NHS is increasingly a shell doling out contracts to private operators backed by private equity. Just five firms received thousands of cataract surgery contracts. They have a profit margin of between 32% and 43%. In 2023-24, they received £536 million from the NHS and made a profit of £169 million. It is a matter of great concern that under their 10-year plan, the Government plan to hand more of the NHS to private equity.
Finally, can the Minister explain what the Government are going to do to curb abuses by private equity?
Lord Altrincham (Con)
My Lords, I declare my interest as a director of South Molton Street Capital. I congratulate the noble Lord, Lord Monks, on securing this important debate about private equity and on his membership of the important French Légion d’honneur alongside Stephen Schwarzman, who is the founder of the largest private equity investment firm in the world: Blackstone.
Private equity and venture capital-backed businesses directly supported approximately 7% of UK GDP, 8% of employment and 9% of gross earnings in 2025; those numbers were, I think, referenced by the noble Lord, Lord Monks. The British Private Equity & Venture Capital Association reports that private capital-backed companies now generate around £200 billion annually in GDP for this country and support 2.5 million jobs. As the noble Baroness, Lady Moyo, pointed out, that is one in 14 jobs in the UK.
It is important for me to frame my remarks with a clear eye to both the benefits and the risks that come with private equity funds. Private equity remains well placed to deliver solid, diversified returns. Over the past two decades, it has outperformed listed equities by between 4% and 6% a year after fees, supported by both the value creation role of active ownership and the illiquidity premium.
For DC schemes supporting UK retirees, those advantages are particularly attractive, as my noble friend Lady Stedman-Scott mentioned. Local government pension pools have already saved £380 million through consolidated private equity investment, and 17 major workplace pension providers have pledged to double their private market exposure to 10% by 2030. The UK’s traditionally cautious pension landscape is clearly opening up, with an estimated £50 billion to £75 billion in new private equity commitments expected over the next five years.
Studies have found that, on average, private equity-backed firms achieve higher productivity growth, as noted by the noble Baroness, Lady Moyo, than comparable companies and often outperform on operational metrics after investment. Long-run analysis of UK portfolio companies suggests that, on average, private equity-backed firms have achieved faster growth in productivity and greater growth in organic employment than comparable private sector benchmarks. When Nat Benjamin from the Bank of England spoke to the House of Lords Financial Services Regulation Committee on 5 November, he commented on the role of private equity in supporting business:
“There have been research and studies on precisely that question—academic research. They tend to show that on average the performance of the businesses, of the corporates that are financed by private equity, tends to improve”.
Private equity and private credit providers create important professional services jobs and income and prosperity for our country and our tax base. It is in the national interest that the Government should work to preserve and strengthen this position because it delivers real, tangible benefits to people across the UK.
However, I appreciate that private equity is not without its risks. We have heard reference to the problems that have arisen in social care from the noble Lords, Lord Monks and Lord Davies, and the noble Baroness, Lady Bennett. The debt burden can become unsustainable if the business hits a downturn and debt repayments and interest eat into cash flow. The noble Lord, Lord Sikka, referenced a long list of private equity calamities in this country and the US and touched on the debacle at Thames Water, which remains a cautionary example. Successive private infrastructure investors, including Germany’s RWE and Australia’s Macquarie, left the company unmodernised and heavily leveraged while continuing to extract substantial dividends when interest rates were very low. When interest rates returned to more normal levels, Thames Water was exposed. It was clear that funding that ought to have been directed towards upgrading the Victorian sewer network, which serves 16 million people around London, was instead diverted to servicing debt.
However, it is important that we do not let these risks deter us from supporting private equity. The question is not whether these funds are wholly good or wholly bad, but how we can manage and engage with them as parliamentarians and Ministers—and, in the noble Lord’s case, as a Government—in a way that minimises risk and maximises benefits for the British public. I welcome that it seems to be in this spirit that the FCA proposes to alter and develop the regulatory regime surrounding alternative investment funds to allow more flexibility for smaller funds, saying that it believes that,
“clearer rules, better tailored to firms, could create efficiencies in how firms do business and further support economic growth and competition”.
Private equity funds have the capacity and potential greatly to benefit our economy. We need to make sure that any changes to the regulatory environment support growth and embed efficiency. We on these Benches will look at this closely as the FCA’s consultation concludes and steps are taken in this direction.
We need to appreciate that the success or failure of these funds is also determined in part by the macroeconomic environment, which the Government have a substantial hand in creating. I appreciate that the Minister cannot comment on specific measures in the Budget, but can he assure us that the Government are forming their plan with a mind to enabling private equity funds and alternative investment funds to continue to contribute to the economy? Does he also recognise that, however they are presented, tax changes can have a real effect on market actors, such as private equity funds, which play an important role in investment, employment and growth? What steps is the Treasury taking to assess and mitigate any unintended consequences so that tax policy does not inadvertently undermine the Government’s growth objectives? I look forward to hearing from the Minister on these points and his response to the other questions raised by noble Lords.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
I thank my noble friend Lord Monks for securing this debate and all noble Lords for their contributions this afternoon. It has been an energetic debate that has covered all bases in the discussion around private equity. The role of private equity is a salient issue for the UK economy, and it is important for us to recognise the role that private equity investment plays. I thank noble Lords for their constructive contributions to this thoughtful debate.
Growth is the central mission of this Government, but we recognise that government alone cannot deliver growth. That is why investment is a cornerstone of the economic strategy. The UK’s Modern Industrial Strategy set out the Government’s commitment to enable investment and growth in city regions and clusters across the country.
The growth of private markets has enhanced the types of capital available to the real economy, providing increased competition and diversification. Private equity companies provide capital from investors with a broad range of risk appetites. This has increased the availability of finance for businesses, providing long-term capital and support for business plans that enable those businesses, especially smaller or high-potential firms, to scale and innovate.
For many companies, private equity plays an essential role, from supporting firms to scale up from the venture capital stage to listing on a public market. By offering diverse sources of finance and allocating risk to where it can best be managed, private equity can reduce pressure on the banking system and support broader economic resilience. Capturing the benefits of this global growth in private markets is essential to increasing growth and investment in the UK.
The Government remain committed to ensuring that private market investment is sensible and sustainable, and we are working closely with the Bank of England and Financial Conduct Authority as we pursue reforms to support growth. Some noble Lords will have seen the Economic Secretary to the Treasury making just that point yesterday to this House’s Financial Services Regulation Committee.
As noble Lords will have heard, the Economic Secretary welcomed the work of the regulators to monitor and understand these risks and welcomed the Bank of England’s proposals for a system-wide exploratory scenario exercise focused on private markets. She noted that the Chancellor will ensure that the Financial Policy Committee continues its work on these risks through her annual remit letter to the committee.
I reassure noble Lords that the Government are committed to maintaining high regulatory standards for private markets, including private equity firms. Private equity companies in the UK must comply with the necessary requirements, including the Alternative Investment Fund Managers Regulations and the Companies Act. These regulations help to ensure that fund managers and private companies act responsibly, balancing the interests of investors with those of the wider economy and society. The Government’s ongoing review of the Alternative Investment Fund Managers Regulations seeks to maintain this balance, strengthening protections where necessary while ensuring that regulation remains proportionate and targeted.
The noble Lord, Lord Monks, asked where we are on the Government’s plans to appropriately tax carried interest, and other tax issues. While the Government do not comment on speculation about tax policy outside of fiscal events, I remind the noble Lord that, at the Budget in 2024, the Government announced their proposals to introduce a revised tax regime for carried interest from April 2026, which will put the tax treatment of carried interest on a fairer and more stable footing for the long term while safeguarding the strength of the UK as an asset management hub.
The reforms will increase tax on carried interest, ensuring that fund managers pay their fair share. At the same time, the effective tax rate for qualifying carried interest will be at the top end of international competitors, reflecting the Government’s commitment to fairness while maintaining the UK’s position as a leading asset management hub.
I will now try to answer all your Lordships’ questions; if I miss any, I will write to the noble Baroness or noble Lord concerned. The noble Baroness, Lady Stedman-Scott, and the noble Lord, Lord Davies of Brixton, mentioned the issues around pension investment reform. The Government’s reforms to pensions are designed to improve outcomes for savers and support UK economic growth. Larger consolidated pension schemes can access a broader range of investments, including private markets, which offer the potential for higher long-term returns.
The Mansion House accord is a voluntary industry-led commitment to invest in these assets, and the Government have taken forward a reserve power in the pensions Bill to act as a backstop. Of course, this does not mean we are complacent. The reserve power includes robust safeguards, including a financial detriment test, a sunset clause and a requirement to consult and publish an impact report before use.
The noble Baroness, Lady Moyo, mentioned the capital markets issues. Britain’s capital markets are deep and liquid, with more capital raised in the year to date than the next three European exchanges combined. The Government are not complacent and have taken forward an ambitious programme of reforms to reinvigorate our capital markets, including a once-in-a-generation rewrite of the listings rules.
The noble Lord, Lord Davies of Brixton, mentioned private market valuations. Alongside the Treasury, the FPC and regulators are working to improve transparency in valuation practices and understand leverage and counterparty exposures. Internationally, the Bank, the FCA and the Treasury are collaborating with the Financial Stability Board better to understand cross-border risks in private markets.
The noble Lords, Lord Davies and Lord Leigh, talked about reassurance on regulations. The Government are reviewing and reforming the regulatory framework underpinning the sector, recognising the key role that it plays in growth for the UK. This exercise is not about cutting back regulations at any cost but about tailoring the requirements to the UK market to boost competitiveness and encourage growth. Existing regulations help to ensure that private companies act responsibly, balancing the interests of investors with those of the wider economy, society and the environment. There are a number of requirements imposed through regulations, including the Companies Act, ensuring that private market firms act in a responsible manner.
The noble Baroness, Lady Bennett, asked several questions and raised issues around, for example, social care. The noble Baroness was right to point out that private equity investment has increased in adult social care, with many services now provided by private companies. Under the Care Act 2014, local authorities must shape local care markets to meet community needs, while the Care Quality Commission oversees care standards and operates a market oversight scheme to mitigate risks from provider failures. The Government plan to build a national care service and have commissioned the noble Baroness, Lady Casey, to recommend reforms, including how services should be organised and funded to ensure fair, affordable and high-quality adult social care for current and future needs.
The Government are committed to delivering children’s social care reform in addition to providing over £500 million to refurbish and expand children’s homes and foster care placements. The Children’s Wellbeing and Schools Bill will improve the safeguarding of children.
The noble Lord, Lord Sikka, mentioned asset-stripping and other issues. Private equity can play a constructive role in supporting businesses, but it remains important that such investment is carried out with transparency and responsible ownership. Incidents of value extraction can of course occur, which can be detrimental to creditors, employees and wider stakeholders. That is why there is regulation in place to address this issue. For example, under the Companies Act, directors of all companies are required to have regard in their decision-making to the long term and to impact of the companies’ operations on the community, and they are required to report against these requirements.
We welcome the CMA’s provisional decision report on veterinary services and continue to engage with the CMA ahead of the publication of the final report, which is expected in the spring of next year. As for the water companies, the Government are fixing the water sector’s broken regulatory system. Sir Jon Cunliffe published his recommendations for water sector reform in the summer and the Government have already responded to a number of them.
Private equity is a vital sector for the economy. There is a lot of good in it and probably some other not-so-good issues with it as well, but the Government are looking at all that and remain committed to fostering a dynamic investment environment that supports sustainable growth, innovation and job creation across the UK. We will continue to monitor developments in private markets and ensure that our regulatory framework evolves to meet emerging challenges while maintaining investor confidence and public trust. I again thank all noble Lords who have taken part.