Dilemma of the covid crash vultures
Having maximised indebtedness in order to avoid paying taxes, vulture capitalists now find they are missing out on state aid during the crisis.
Whilst workers are driven to their wits’ end trying to make ends meet and keep their families safe through the current health emergency, spare a thought for the trials and tribulations endured by those private equity firms that specialise in buying up troubled companies, stripping their assets, sacking their workforce and then leaving them burdened with enormous debts, earning for themselves the title of vulture capitalists.
Such private equity dealings reach fever pitch during the crisis of overproduction when footloose capital, starved of opportunities for productive investment, instead indulges in an orgy of debt-fuelled speculation in which vast fortunes can be made or lost on the turn of a dice.
Workers will be interested to learn that these public-spirited adventures are funded by the taxpayer. A recent article in The Times explained how companies that have been snaffled up by private recentequity firms manage to dodge taxes by misrepresenting their true level of profitability – and all with a minimum of hard cash fronted by the vultures in the first place.
“Private equity deals typically are structured to include a thin layer of equity capital and a large proportion of debt. The cost of servicing the debt pushes down the company’s profits, which has the effect of lowering its taxes. It can result in healthy businesses announcing statutory losses.”
But now the vultures have a dilemma. While all around them other private businesses are tapping into a bonanza of state aid to prop up capitalism, companies bought out by private equity firms are panicking that they will miss the boat.
As The Times puts it: “In the race to access the government’s coronavirus loan schemes, which carry those reassuring 80 percent state guarantees, businesses owned by private equity groups have been left behind, unable to clear the hurdle of European state aid rules.”
The problem is that, whilst downplaying company profitability may reduce the tax burden, it may simultaneously disqualify the company from receiving state aid.
“Under European rules, a company is blocked from receiving state aid if it is an ‘undertaking in difficulty’ and has accumulated losses that are equal to or greater than 50 percent of its subscribed share capital.
“The rule is aimed at stopping businesses that are unviable from being propped up artificially. Unfortunately for private equity-owned companies, they are also being classed as undertakings in difficulty because of the losses they publish as a result of their debts. As a result, they are being rejected for state-guaranteed loans by the commercial lenders handling Britain’s rescue schemes.
“A survey carried out by the British Private Equity & Venture Capital Association in early May provided a snapshot of the woes facing businesses controlled by buyout firms. It found that 51 private equity-owned companies had been blocked from accessing the coronavirus business interruption loan scheme and a similar lending programme for larger firms.
“A further 93 companies had not applied because they knew that they would be barred by the rules drawn up in Brussels.” (Private equity firms fear a day of reckoning by Ben Martin, The Times, 26 May 2020)
But before we get too grief-stricken by the plight of the hapless vultures, we should remember that there will be plenty more carcasses for them to batten on in the months to come.
As one private equity executive put it: “About a third of the leisure, retail and consumer-facing sectors will be bankrupt, no question about that. So how they get out of that will require corporate activity and there will be opportunities, for sure.”
You bet.
