The Sucker-Covered Tentacles of Private Equity

... and Labour's embrace of NHS privatisation

NHS workers protest over pay justice, patient safety and an end to privatisation during 73rd anniversary of the Health Service. Credit: John Gomez Shutterstock

On Monday morning I woke to a furore caused by Labour’s Shadow Health Secretary’s suggestion that a Labour government would use “spare capacity in the private sector to cut the waiting lists.” And that he, Wes Streeting MP, was “up for the fight” against “healthcare unions and Labour supporters” opposed to privatisation: …”middle class lefties (crying) ‘betrayal.’”

“The real betrayal” he argued “is the two tier system that sees people like them treated faster - while working families like mine are left waiting for longer”.

Mr. Streeting - and those planning to vote Labour - should beware of what he wishes for.

I have been travelling. To Finland’s Helsinki University for a stimulating workshop on alternatives to the US dollar system. Then to Scotland for debates about the economy. Back home last week I celebrated the arrival of Spring with family.

It did not take long before I was quickly and literally brought back down to earth - only to discover what a dangerous sport gardening can be. While weeding my allotment I tripped and fell on to a post with a rusty nail, tore open my arm, and had to be rushed to the local hospital’s A&E Unit to be cleaned up and taped together again…

On a Sunday afternoon, the busy NHS hospital staff treated me - and many hundreds more - promptly, and with empathy and respect. An experience that made me grateful for the skills and care of the GP and for the efficiency of NHS administrative staff - despite no money changing hands.

Labour’s dalliance with privatisation

Streeting’s intervention the following Monday morning was jarring: not just because it was issued after my NHS experience; not just because it was insulting to a cohort of voters; but because Britain is suffering a collective nervous breakdown over another privatisation debacle - Thames Water. On the Friday before, Thames Water’s parent company, Kemble had defaulted on a £400 million debt. As Streeting published his provocation in the Sun newspaper, a Conservative government was grappling with the costs and political embarassment of re-nationalising Thames Water - a debt-free utility monopoly when privatised in 1989 by Margaret Thatcher, one subsequently acquired by the Australian private equity firm - Macquarie.

Thames Water’s angry 16 million customers and many investors were grappling with the environmental costs, the unpayable debts, financial losses and uncertainty caused by the company’s failure. On that same morning the Financial Times reported that

At the end of 2022, a group of large pension plans, including funds from Canada, Japan and the UK, discovered that they had lost a large part of the £5,000,000,000 (of pensioner savings) invested in Thames Water ..recorded on their books.

This Easter, they learnt that they had probably lost all of it.

There is only one way for a water utility serving the capital of a G7 country to lose so much value so fast: it was never worth £5billion to begin with. 

Private Equity and the importance of asset valuations

The FT article then explained that investors had effectively been scammed by an economic model that gave a false valuation of the company that was Thames Water.

You do not need a PhD in econometrics to guess in whose interests that economic ‘model’ was commissioned and designed.

The point is this: the detachment from regulatory oversight of private equity (PE) and other Wall St. firms means that any old fraudster can cook up any old economic ‘model’ to fool investors, falsify the valuation of assets, and attract new capital or savings.

Regrettably, investors and pensioners are not the only losers. The false valuation of Thames Water assets is a scary warning - and threat - to us all.

Why?

Because the correct and honest valuation of assets or collateral - by independent regulators - is vital to creditors - lenders, bankers and pension fund investors. But it is also vital to trust in the whole financial system. A false valuation of assets, by undermining trust in the system, poses a systemic risk to the whole financial system.

On the 9 August, 2007 a false valuation triggered the Global Financial Crisis of 2007-9. On that day, a bank, BNP Paribas, announced in a press release that they had found it impossible

to value certain assets fairly regardless of their quality or credit rating

and as a result barred investors from redeeming cash, and immediately froze lending to other banks.

That press release shattered confidence not just in the real value of BNP Paribas’s financial assets, but in all financial assets across the global financial system. The collapse in confidence launched the catastrophe that was the 2007-9 Great Financial Crisis.

Private Equity, NHS privatisation & financial stability

In a September 2023 System Change post, I explained how Private Equity firms operate when acquiring public assets like water or healthcare companies. They borrow a large proportion of the cost of the purchase, leverage finance against the collateral that is the asset; and then dump the debt on to the asset. That could be a hospital, GP surgery, or ambulance provider. It is done in the hope of shifting liability away from the PE company; and in the hope of collecting a share of the ‘rent’ or income generated by the private hospital, GP surgery or ambulance provider.

Its called a private equity "‘leveraged buyout’, as Carolyn Sissoko explains and requires the removal of a firm like Thames Water from public stock markets, where shares are publicly and transparently traded - and then ‘taken private’ - i.e. out of sight of regulators. The PE firm does so

…without paying cash for the shares. Instead the buyer/owner puts up about 10% of the price and borrows the remaining 90%. The catch is that the buyer/owner does not owe the debt, instead the target/purchased firm owes the debt. In short, the buyer gets all the advantages of ownership and control of the company, but has no liability whatsoever on the debt used to purchase the company.

Or as an American congressman Bill Pascrell put it more colourfully:

Private equity firms follow a well-worn blueprint: buying companies, saddling them with mountains of debt and then squeezing their acquisitions like oranges for every dollar before tossing the rind into the wastebasket.

In America, he continued:

Private equity influence stretches like an octopus, with tentacles in large and small hospitals, physician practices, dental practices and scores of nursing homes …

Private Equity and the NHS

The fact is the American model of healthcare already has its sucker-covered tentacles all over Britain’s publicly-funded National Health Service.

In the past two years, according to the Financial Times, private equity firms have struck 150 deals for UK healthcare companies. These firms have bought up ambulance fleets, eye-care clinics and diagnostics companies. Last year it was reported that one such firm acquired a staffing agency that employs NHS doctors and nurses, betting that the painful backlog of rescheduled appointments will be good for business.

And then in November, 2023, Fortune magazine reported that

The U.K.’s National Health Service will start working with Palantir, the tech company cofounded by PayPal’s Peter Thiel, on a data overhaul following a deal worth up to £330 million (about $413 million). 

While that could mean a massive revamp for the U.K.’s publicly funded health care system, it’s sparked concerns about giving Palantir a pivotal role in the NHS.

“This is a turning point for the NHS. It’s about your right to control who sees your health record and how this country should handle one of the most precious public assets our NHS has—our collected health data,” the independent Foxglove group said in a statement.

With encouragement from the likes of Labour’s Mr. Streeting, the “working families” of Britain can look forward to a future private, healthcare system that both accumulates data for surveillance purposes, and for sharing with insurance and pharmaceutical companies. In other words, a health system that mimics the costs, risks and horrors of American for-profit healthcare.

Already, as Allyson Pollock and Peter Roderick explained here:

in a development familiar to Americans but is something quite new in Britain, more and more people are turning to GoFundMe to raise money for medical treatment.

Why should we at System Change care?

There are three reasons we should care. The first is that the privatisation of a great, affordable public good that is the pride of Britain will be costly for British taxpayers, for users of our health services, and for the British state.

Second it will be harmful both for our individual health and well-being, but also for the collective health of fellow citizens and future generations.

Third, it could threaten another global financial crisis. That is because of the reckless build-up of unsustainable debt by private equity firms and their peers on Wall St. If you don’t believe me, consider this warning published on Monday, 8th April 2024 by the authors of the International Monetary Fund’s Global Financial Stability Report:

the migration of this lending from regulated banks and more transparent public markets to the more opaque world of private credit creates potential risks. Valuation is infrequent, credit quality isn’t always clear or easy to assess, and it’s hard to understand how systemic risks may be building given the less than clear interconnections between private credit funds, private equity firms, commercial banks, and investors. (Emphasis added)

The fact is the vast quantities of ‘opaque’ debt generated by private equity (PE) and other Wall St. firms has led to a bubble…a giant, global debt bubble the IMF considers a systemic risk to us all.

A bubble that while immensely profitable for PE’s private investors - Wall St’s 1% - is a grave threat to the stability, livelihoods and well-being of millions of Britons - including Mr. Streeting’s very own “working family”.

This time, he and British voters, will not be able to say they were not warned.