The controversy instantly ignited by the possibility of private equity gobbling up Morrisons should be an amber light for the big buy-out houses.

Much of the reaction to the potential acquisition of the grocer by CD&R has been unbridled hostility.

Fears have been expressed about everything from the danger of asset stripping through to the implications for jobs, the impact on farmers and whether, following the heroic role played by grocers during the pandemic, food businesses should be ring-fenced from perceived predators to ensure the protection of the national interest. And that’s all on top of the small matter of valuation.

“Private equity houses need to be more open, in the same ways that are expected of public companies”

As far as some in retail are concerned, private equity is a devil incarnate and the first exhibit to be wheeled out is usually the carcass of Debenhams. The department store group’s ultimate demise, with the loss of 12,000 jobs, is frequently attributed to decisions made years before by the former private equity owners.

Despite that, and some other high-profile failures, private equity has often been a force for good in retail. 

THG – formerly The Hut Group – was the biggest IPO in years when the retailer and tech specialist went to market last autumn. One of the financiers that helped to build THG was private equity giant KKR, which had invested six years previously. 

Similarly, CD&R was a backer of another great UK retail success, value giant B&M – not just financially but through the retail expertise it could bring. Former Tesco chief executive Sir Terry Leahy, also involved in the possible Morrisons deal, chaired B&M, which at the time of writing was valued at £5.58bn – getting on for twice that of Marks & Spencer.

Fascia of Morrisons supermarket in Watford

Morrisons has been a responsible corporate citizen during the pandemic

While in the popular imagination private equity means ruthless men in suits, investors often include pension and endowment funds, so the wealth they create spreads far beyond the boardroom tables of Mayfair.

But few people know that. Private equity groups must shoulder much of the blame for such ignorance and, if they hope to address suspicion of their motives, better educate people about what they do.

In an age of unprecedented scrutiny, transparency and discussion driven by digital technology’s capacity to transfer and amplify information as never before, living in the shadows is a forlorn hope. Private equity houses need to be more open, in the same ways that are expected of public companies.

They are not called ‘private’ for nothing, of course. The ability to act fast and decisively out of the spotlight of public ownership has traditionally been seen as one of the strengths of PE. 

That speed and purpose of action can surely be retained, though, alongside greater openness.

While nobody would expect the would-be buyer of a company to lay out every detail of their strategy in advance, there is scope for more information to be made available even if only principles, such as a commitment to jobs or honesty about how value may be created through asset disposals or sale and leasebacks.

Reputation management

Over the last few years, companies have increasingly talked about stakeholders rather than shareholders. Those stakeholders include employees, who deserve to know what may be in store for them in the event of a takeover.

The interests of other stakeholders, such as suppliers and customers, should also be recognised. In grocery, as threats such as inflation and supply chain disruption hove into view, the biggest stakeholder may end up being the nation.

In France, concerns about food security prompted the government to stamp down hard on the hopes of Couche-Tard to acquire Carrefour.

The UK is not France and the recent highly leveraged acquisition of Asda by the Issa brothers shows that food is not yet a ring-fenced retail sector.

“The buy-out barons have some explaining to do about what they will bring to the party in troubled times”

But, as the UK negotiates the fallout from Brexit and Covid-19, it is not inconceivable that grocery deals will draw increased government scrutiny and even intervention – perhaps especially in the case of Morrisons.

The big four grocer, which describes itself as “British farming’s biggest customer”, showed itself to be among the most responsible of corporate citizens during the pandemic. It won plaudits for paying small suppliers immediately in the most difficult days of the outbreak and setting a new store staff pay benchmark of £10 an hour in recognition of their vital contribution.

The buy-out barons have some explaining to do about what they will bring to the party in troubled times.

Food might be a special case but private equity, in general, is desperately in need of some reputational polishing. Just like the management teams of listed companies, it can be good, bad or indifferent. It needs to do a far better job of telling people about how it has often been the first of those.

When at the merest whiff of a bid, the Daily Mail, on one hand, uses terms such as “private equity plundering” and Labour MPs, on the other, talk of “asset stripping”, you’ve got a problem.