Businesses backed by private equity face heightened default risks, warns Bank of England

The Bank of England has warned that companies owned or backed by private equity firms are at greater risk of default than other large companies.

According to new research, these companies are more vulnerable to financial instability, especially when compared to companies that rely primarily on traditional lenders such as banks.

The research highlighted that more than two million UK workers work in companies backed by private equity funds, which account for 15% of the country’s corporate debt. Private equity-backed companies are also likely to face challenges in meeting debt obligations due to lower earnings and returns compared to interest expenses.

In 2023, more than one in five private equity-backed companies were at risk of default, an improvement from one in four companies in 2022. However, this is still much higher than the risk of default among Listed companies (11%) and other large companies (14%).

Bank of England researchers found that private equity-backed companies are more likely to rely on riskier forms of debt, such as private credit and leveraged syndicated loans, making them more vulnerable to market downturns and cash flow issues. Reliance on debt, coupled with a high interest rate environment, has increased refinancing risks for these companies.

The bank stressed that improving transparency within the private equity sector would help mitigate some of these weaknesses. She noted that better clarity around valuation practices and leverage levels could reduce risks across the sector.

Despite these concerns, Michael Moore, chief executive of the British Private Equity and Venture Capital Association, defended the sector, noting that private equity plays a crucial role in financing UK companies and supporting companies during economic pressures. He pointed to the positive impact of this industry on competition in financial services and its ability to improve poorly performing companies.

The bank’s data revealed that a third of private equity-backed jobs are located in London, with large concentrations in Yorkshire and the Humber, the East of England, and the South East of England. Sectors that private equity firms most often target include communications, finance, insurance, and professional services.