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

October 1, 2024

Businesses owned or supported by private equity (PE) are at a significantly higher risk of default compared to other large corporates, the Bank of England has cautioned.

According to new research, these companies are more vulnerable to financial instability, particularly when compared to firms that primarily rely on traditional lenders like banks.

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

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 among listed companies (11%) and other large businesses (14%).

The Bank of England’s researchers found that private equity-backed firms are over 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 issues. The reliance on debt, combined with the higher interest rate environment, has increased refinancing risks for these businesses.

The Bank emphasised that improved transparency within the private equity sector would help 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, chief executive of the British Private Equity & Venture Capital Association, defended the sector, noting that private equity plays a crucial role in funding UK businesses and supporting companies during economic stress. He pointed to the industry’s positive impact on competition in financial services and its ability to improve underperforming companies.

The Bank’s data revealed that a third of all PE-backed jobs are located in London, with significant concentrations in Yorkshire and the Humber, the East of England, and the South East. Sectors most often targeted by PE firms include communications, finance, insurance, and professional services.