Approximate read time: 15 minutes
This briefing has been prepared ahead of the following forthcoming question for short debate in the House of Lords:
Lord Monks (Labour) to ask His Majesty’s government what assessment they have made of the role of private equity in the UK economy.
This article updates material contained in the following House of Lords Library publication:
House of Lords Library, ‘Regulation and practices of private equity’, 15 July 2022
1. What is private equity?
Private equity is defined as investment by a managed fund, the primary aim of which is to assume a controlling share of the companies it invests in. The shares that the fund acquires are either not publicly traded or will be delisted after their acquisition. The term private equity is often used to refer to investment in mature firms with the goal of growing the business through reducing inefficiencies and changes in how its managed. In contrast, seed capital investment for start-ups is referred to as venture capital. Some private equity firms also make venture capital investments.
The companies are often held for a few years, before attempting to sell them at a profit. For example, the British Business Bank website explains:
Private equity firms typically aim to hold their investments for a period of four to seven years. After this period, they will seek to sell or ‘exit’ their stake, potentially through the stock market, to a corporate purchaser, or to another investor.
The ‘target companies’ of private equity investment can be private companies or those which are publicly listed. If the target is a publicly listed company it becomes delisted, or taken private, once the private equity firm has taken control.
Private equity first came to prominence in the 1980s, when it was associated with hostile takeovers. In hostile takeovers, private equity firms acquire control of publicly listed firms against the wishes of their management board. This is usually achieved by buying enough shares from existing shareholders to control the company, or by replacing the management board. The acquiring company can influence the composition of the board because board membership is voted on by shareholders.
Private equity investments are funded using a mixture of normal shares, preference shares and debt instruments. Debt is usually 50 to 80% of the overall financing. The term ‘leveraged buyout’ is used to refer to an investment that is financed 90% or more by debt. These can be controversial as the target company’s assets can be used as collateral by the acquiring company.
The vehicle for a private equity investment is a private equity (PE) fund. These are usually limited partnerships. The majority of the shares in a PE fund (typically 99%) are held by limited partners such as pension funds and other institutional investors, which have limited liability. The private equity firm is a general partner, typically owns 1% of the shares and has full liability. It is responsible for managing the fund.
2. How is private equity regulated in the UK?
In the UK, it is the fund manager rather than the fund that is regulated. Most private equity fund managers are ‘alternative investment fund managers’ (AIFMs) and are required to be authorised and regulated by the Financial Conduct Authority (FCA). AIFMs with assets under certain thresholds are subject to a lighter regulatory regime than larger ones.
In 2025, the government and the FCA have consulted on changes to the way AIFMs are regulated. Much of the UK’s asset management regulation is derived from European Union (EU) legislation, including the Alternative Investment Fund Managers Directive (AIFMD). The Treasury has proposed to bring into effect provisions to repeal AIFMD’s firm-facing legislation. The FCA stated:
We want to make it easier for firms to grow, compete, innovate and enter the market. We also want to protect consumers and encourage firms to manage risks responsibly. This work is part of our commitment to streamline the regulatory regime for asset managers. We believe that clearer rules, better tailored to firms, could create efficiencies in how firms do business and further support economic growth and competition.
The Treasury’s consultation paper and the FCA’s call for input identified several areas of concern, including:
- outdated and inflexible legislative thresholdsfor AIFMs that have not accounted for market movements or inflation;
- cliff-edge effectscreated by a significant increase in regulatory requirements for small registered or authorised UK AIFMs to become full-scope UK AIFMs, which may disincentivise growth;
- complexity of the current regime, which may mislead consumers about the level of regulatory oversight; and
- inflexible and prescriptive requirementsthat do not allow for a proportionate approach to regulation based on the size and activities of different firms
To address these issues, the changes proposed in both documents included:
- A simplification of existing rules: The FCA has said that it wants to make the regulatory regime easier to understand and navigate, making it simpler for new entrants to join the market and for existing firms to grow without unnecessary regulatory burdens. To this end, the FCA proposes to simplify its rules and group them into clearer, thematic categories that reflect different business activities and development phases.
- Different rules for AIFMs undertaking different activities: As part of this change, the FCA sought views as to whether venture capital and growth capital funds and LCICs (listed closed-ended investment companies) should be regulated differently. For LCICs, the FCA is considering if a more tailored approach can be applied in respect of transparency requirements, leverage and delegation.
- Removing existing legislative thresholds: The Treasury proposes to remove the legislative thresholds that govern how AIFMs—particularly those which fall under certain thresholds for asset size, depending on the nature of their activities—are authorised. This would enable the FCA to determine proportionate and appropriate rules for AIFMs of all sizes, having regard to their investment activities and investor base as well as specific risks they pose.
- Three-tiered approach to regulating AIFMs:Instead of the existing thresholds, the FCA proposes a three-tiered approach to the regulation of AIFMs. Large firms would be subject to a similar regime for current full-scope UK AIFMs, with certain rules only applicable to firms doing specific activities and “burdensome rules” disapplied. Mid-sized firms would be subject to a comprehensive regulatory regime that is consistent with the regime for the largest firms, including the key rules in the FCA Handbook, but detailed procedural requirements would not be included to allow for greater flexibility and proportionality. Small firms would be subject to core requirements appropriate to their size and activity, but not more burdensome regulation.
3. Impact of private equity in the UK
3.1 Growth of private equity and resultant economic impact
The scale of private equity has grown “exponentially” in the last two decades, according to Eli Talmor, emeritus professor of accounting at the London Business School, in evidence to the House of Commons Business and Trade committee in December 2023. In the same evidence session, John Plender, senior editorial columnist at the Financial Times, said he believed that growth had been driven by an era of cheap finance (particularly following the 2008 financial crisis) and “ultra-loose monetary policy”.
Private equity plays a significant role in the UK economy. The British Private Equity and Venture Capital Association (BVCA), which advocates on behalf of private equity, contends that private capital-backed companies now generate £199bn annually in GDP and support 2.5mn jobs—up from 2.2mn in 2023. The BCVA also maintains that private equity and venture capital backed businesses directly support approximately 7% of UK GDP, 8% of employment, and 9% gross earnings in 2025.
Overall, in 2025 the BVCA reports that there are over 12,900 private equity and venture capital backed businesses. This represents a 5% increase in the number of companies compared to 12,200 in 2023.
3.2 Does private equity come with a cost?
The scale of the growth of private equity has raised concerns over its impact. In his book, ‘Our lives in their portfolios: Why asset managers own the world’, Brett Christophers argues that private equity firms and related asset managers “increasingly own the physical as well as financial world around us”. This includes “the roads we drive on; the pipes that supply our drinking water; the farmland that provides our food; energy systems for electricity and heat; hospitals, schools, and even the homes in which many of us live”. Opponents and advocates for private equity dispute whether this is a positive or negative development. Writing for the Guardian, Alex Blasdel argues the result has been a “massive wealth transfer from society to private equity” where regulation lags behind the economic reality that the “playing field is tilted in private equity’s favour”. He writes:
In the annals of private equity, there are now many familiar horror stories. Firms have snatched up popular retailers, then gutted and destroyed them, along with the livelihoods of hundreds of thousands of working-class people. Private equity-owned nursing homes have been stripped of resources and staff […] When it comes to private equity, you don’t need to cherrypick the horror stories—you have to wade through them.
Meanwhile, others argue that while there are examples of bad practice, private equity remains predominantly a responsible investment mechanism:
For some, private equity investors represent all that is bad in the ‘greed is good’ culture. Asset stripping and profiteering at the expense of the workforce or over-burdening otherwise successful companies with debt, that leaves them in a precarious position should trading fortunes change. But while there are some well-discussed examples of that sort of bad practice, private equity investment is mainly done in a diligent and responsible way and the rigours that the investment regimes bring can help to promote and accelerate the type of governance and responsibility culture that is valued in today’s society.
As market conditions have changed in recent years (for example, increases in interest rates) some, such as John Plender, have questioned whether private equity is now “having a difficult time”. Recent research from the consultancy firm KPMG noted a rebound in private equity deals in 2024, but said that in 2025:
UK private equity has hit the brakes in the first half of 2025. Total deal volumes fell to their lowest point since late 2020—a clear sign that macro uncertainty is now materially shaping investment behaviour.
A recent podcast from the Economist also noted that private equity is facing increasing challenges, arguing that funds are “struggling to flip businesses profitably”, “deal volumes have slumped”, and “new capital has become harder to raise”.
The Governor of the Bank of England, Andrew Bailey, has recently announced that the Bank of England was planning to run a “stress test” of private equity and credit firms. The move followed concerns about the private credit market, where companies arrange loans from non-bank lenders, prompted by the collapse of two US firms—the car parts supplier First Brands and subprime car lender Tricolor—and fears of similar structural weaknesses in the economy that led to the 2008 financial crisis. Mr Bailey said:
I think the big question […] is: are these cases idiosyncratic, or are they what I call the canary in the coalmine? Are they telling us something more fundamental about the private finance and private assets sector? I think that’s still a very open question in the US. I think it’s a question we have to take very seriously.
Private equity and private debt are often viewed as distinct investment strategies. However, some commentors argue they are increasingly intertwined in today’s financial landscape.
In addition, there remain concerns about whether private equity deals are beneficial for the companies they acquire. Several observers have argued that PE fund managers place too much debt on their acquired portfolio companies. This means that they cannot take on more debt to finance future projects, increasing the risk of bankruptcy. It is argued this behaviour is incentivised because PE fund managers can use the proceeds of the debt financing to pay themselves and investors in the fund a dividend, known as dividend recapitalisation. The structure of PE funds’ investment usually means that the managers are largely insulated from losses; for example, the PE fund manager does not have to sell private assets to pay debtholders. In addition, PE funds often own preferential shares, meaning that they are paid before other creditors and are able to recover their investment in case of bankruptcy. It is argued that this can lead to excessive risk taking. However, others such as the Economist have argued that the “blend of financial and operational engineering” employed by PE funds has “added genuine value to thousands of firms”.
There are also questions regarding the employment practices of private equity backed businesses. Professors Eileen Appelbaum and Rosemary Batt, authors of ‘Private equity at work: When Wall Street manages Main Street’, point to a study that found that PE-owned establishments had “significantly lower employment and wages post buyout than did comparable publicly-traded companies”. This was “despite the fact that the PE-owned establishments had higher levels of wages and employment growth than their counterparts in the buyout year”. The same study found that employment in PE-owned companies was 3 to 6.7% lower in the first two years after buyout, and 6% lower after five years.
The Economist points to studies with more mixed results, including a finding that among PE-backed firms in the US employment declined in existing plants by 4% relative to others in the same industry. However, in new operations, started from scratch or acquired, it increased by 2.3%. A University of Chicago study of 9,800 American buyouts between 1980 and 2013 concluded that employment shrinks 13% over two years after buyouts of publicly listed firms relative to control firms, but grows by 13% after buyouts of privately held firms.
Private equity funds can generate significant returns for their investors. These can include institutional investors such as pension funds and higher education endowment funds. Some argue that these returns are better than investors could achieve by buying equity in publicly traded companies. The Economist highlights that “since the mid-1990s private-equity funds have outperformed comparable share indices over various time periods by two to six percentage points a year”. However, Professors Appelbaum and Batt argue that returns on private equity investments are not as lucrative as some believe. They say academic studies show that median private equity buyout funds have historically not beaten the stock market and that private equity returns should be adjusted for the higher risk of this type of investment and the fact that fund managers’ returns are highly variable.
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