Private Equity: A Controversial Force in Business
Private equity is one of the most divisive topics in modern business. Supporters argue it brings investment, expertise, and efficiency, while critics see it as a path to profiteering, cost-cutting, and staff losses. The debate intensifies when private equity enters essential services like the NHS or veterinary care. One in eight British workers is now employed by private equity-backed firms, making its influence undeniable.
To illustrate the contentious practices, the Guardian created a fictional vet practice, Florence Waggingtale Veterinary Practice. This example focuses on three controversial aspects: the use of debt, cost-cutting, and short-term ownership. It is not exhaustive but highlights key criticisms.
The Use of Debt in Leveraged Buyouts
Imagine a local vet practice where you take your dog. The owner changes, but you might not notice. Behind the scenes, a private equity firm buys the practice for £10m using a leveraged buyout. In such deals, only a small portion comes from the private equity firm itself—typically 2-5% of the total investment, according to the Institutional Limited Partners Association (ILPA). In this case, the firm contributes 2.5% (£0.25m). Investors, such as pension funds or high-net-worth individuals, provide 45-50% (£4.75m) in exchange for financial returns. The remaining 50% (£5m) is borrowed, often from a bank.
The key risk is that the debt is repaid from the vet practice's cashflow, not the private equity firm's funds. This means the business effectively pays for its own acquisition, saddling it with significant debt from the start. James Gribben, spokesperson for UK Private Capital, an industry body, defends this practice: "Responsible use of leverage is about optimising a company's capital structure to support growth, not placing it under undue strain." He adds that lenders conduct rigorous due diligence and that leveraged buyouts are just one of many financing structures.
Cost-Cutting and Profit Maximisation
Private equity-backed companies often retain the original branding, making ownership changes invisible to customers. However, the Competition and Markets Authority (CMA) has called for greater transparency. Dr David Reader, a senior lecturer at the University of Glasgow, notes that private equity's "underlying, very clear incentive is profit maximisation in a short space of time." Cost-cutting often targets wages, the largest expense. Suzanna Hudson-Cooke of the British Veterinary Union (BVU) reports that non-clinical staff like receptionists and vet care assistants have been reduced, forcing clinical staff to take on extra duties.
Another tactic is raising prices. Vet bills in Britain rose 60% between 2015 and 2023. A CMA investigation found that private equity-owned groups charged on average 18% more than independents. For example, a cat owner was quoted £900 for teeth plaque removal. Customers may struggle to switch vets due to "roll-ups," where private equity firms acquire multiple practices in an area. As of 2024, 44% of small animal practices are private equity-owned, according to the CMA. Dr Scott Summers, associate professor at the University of East Anglia, warns that consolidation could make pet ownership unaffordable for all but the wealthy.
Gribben counters that private equity professionalises businesses and helps them adapt to challenges like the energy transition. He argues that roll-ups bring strategic benefits and do not eliminate competition, as regulators ensure standards and choice are protected. The CMA has recommended transparency of ownership and clearer pricing, while there is a legislative push for a new independent regulator for veterinary clinics.
Short-Term Ownership and Exit Strategies
Private equity firms typically hold investments for four to seven years, according to UK Private Capital. Dr Summers expresses concern about the sector's state after exit: "They'll actually kill the market because people will stop going." When the firm sells, it repays investors with returns, but the debt remains with the vet practice if a leveraged buyout was used. In a best-case scenario, the business has grown and is more efficient. In a worst-case, it is left with high debt and poor service, driving up prices further. Summers fears this could lead to a point where "having a pet is just for the elite."
Gribben insists that private equity investment is long-term, with firms holding investments for over six years on average. He argues that creating growing companies is essential for high returns. Dr Reader acknowledges benefits like investment in new technology, flexibility, and higher pay for some staff. However, both Reader and Summers stress that these benefits must be weighed against risks, especially in care-centred markets. Summers questions whether private equity adds enough value given the societal risks.
