What happened next is that the water companies that remained publicly quoted felt obliged to follow suit, no doubt under pressure from their own shareholders, who had looked on enviously at private equity’s gains. So the listed groups ended up with more debt too.
Now it was never the case that their solvency was remotely threatened. Indeed water firms’ balance sheets remain healthier than those of their counterparts in energy. But, while the habits of private equity are universal, there is something peculiar to Britain’s investment climate that conspired with water firms’ debt levels to put their finances under more strain than was necessary.
That peculiar characteristic of Britain’s investment environment is its obsession with income.
This obsession starts with individuals and organisations such as pension funds and charities – the clients of fund management firms – and transmits itself to those firms, which are for the most part the actual owners of the shares of British businesses.
Part of the firms’ response is to launch large numbers of income funds, which then need to find large numbers of firms that pay good dividends in which to invest their clients’ money.
The result is that many of this country’s listed companies feel pressure from their investors to use a lot of their profits to pay dividends. If they know that this is what their suppliers of capital want, they will be inclined to give it to them.