Companies owned or backed by private equity (PE) are at significantly greater risk of default than other large companies, the Bank of England has warned.
According to new research, these companies are more vulnerable to financial instability, especially compared to companies that rely primarily on traditional lenders such as banks.
The research shows that more than two million British workers are employed by companies backed by private equity funds, which account for 15% of the country’s corporate debt. PE-backed companies are also more likely to experience difficulties meeting their debt obligations due to lower profits and returns relative to their interest costs.
In 2023, more than one in five PE-backed companies were at risk of default, an improvement from one in four in 2022. However, this is still significantly higher than the default risk of listed companies (11%) and other large companies (14%).
The Bank of England researchers found that private equity-backed companies are more than twice as likely to rely on riskier forms of debt, such as private credit and leveraged syndicated loans, leaving them more exposed to market downturns and cash flow problems. The dependence on debt, combined with the higher interest rate environment, has increased refinancing risks for these companies.
The Bank emphasized that better transparency within the private equity sector could mitigate some of these vulnerabilities. It noted that better clarity around valuation practices and leverage levels could reduce risks across the sector.
Despite these concerns, Michael Moore, CEO of the British Private Equity & Venture Capital Association, defended the sector, noting that private equity plays a crucial role in financing UK companies and supporting businesses during economic stress. He noted the sector’s positive impact on competition in financial services and its ability to improve underperforming businesses.
The Bank’s data showed that a third of all PE-supported jobs are in London, with significant concentrations in Yorkshire and the Humber, the East of England and the South East. Sectors most commonly targeted by PE firms include communications, finance, insurance and professional services.