This year has seen a resurgence of private equity interest in UK-listed companies. A growing number of businesses, including online retailer THG, credit card processor Network and oil field services platform John Wood are in takeover talks with private investors.
The renewed demand follows a global slump in private equity deals last year, as rising rates lifted valuations. In 2021, the industry spent more than $1trn (£800bn) globally to beef up its portfolios, before activity slowed, according to consultancy Bain & Co.
During 2021, private equity firms signed a record 863 transactions in the UK, but the deal count fell by 15% last year, according to KPMG.
Dry powder
But there are also record levels of dry powder in the market, with global firms sitting on a whopping £3.7trn in cash to be deployed, according to Bain & Co.
Claire Trachet, chief executive and founder of the eponymous advisory firm, said that last year’s uncertainty has caused a reluctance to invest. “This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal ready as optionality will increase in the second half of this year,” she predicted.
Indeed, the resurgence in buyout talks is a sign that investor appetite is picking up again and UK plc could be on the menu. One reason is that UK-listed companies are seen as relatively cheap compared to the US market, a factor reinforced by the relatively high value of the dollar compared to sterling.
Sterling slumped to a record $1.12 (89.6p) low last autumn amid political turbulence. It has since recovered to $1.24 (99p) but still offers US investors relatively greater purchasing power.
A survey conducted by stockbroker Numis last year found that more than 70% of UK-based private equity investors focused on domestically-based firms. More than 90% of respondents said they were eyeing UK listed corporates in take-private deals.
But Trachet also warned about the lack of capacity in the UK to execute these deals. “Although this is a positive reflection on the UK in terms of what has happened to date, it also signals how there is no one in the UK big enough to act on these acquisitions, showing us that a lot of the financial power for deals lies outside the UK. This leaves us with a question mark of what will happen next,” she said.
Bargain bucket
Renewed interest in UK markets has sparked political controversy in the past as some private equity firms have snapped up firms such as supermarkets Morrisons and Asda at bargain prices.
Asda prides itself in offering affordable deals but was acquired by private equity investors for £6.8bn in 2021. A bargain bucket, it appeared, as a year later the new owners valued the firm at 20 times what they paid for it.
The growth in take-private deals raised concerns about the future of UK plc with the number of companies trading on the London Stock Exchange shrinking by more than 12% during the past three years, according to the Quoted Companies Alliance.
Shareholders are increasingly concerned that public firms are being sold at a discount. For example, a private-equity takeover of conference organiser Hyve faced opposition from several shareholders, including M&G Investments. Shareholders argued that the deal, which priced the events business at £363m, significantly undervalues the firm.
They are concerned that private takeovers of UK firms might be motivated by a short-term hunt for profit and not to invest in long-term development.
Political push
The growing UK private market could be an opportunity for some institutional investors, including local authority pension schemes and de ned contribution providers, who are increasingly eyeing private markets in a bid to diversify their portfolios.
This trend is heavily promoted by the government, which has launched the Patient Capital Review to attract more cash into private markets.
The same objective is also being followed by the Value for Money Consultation and the local government pension scheme pooling consultation.
Examples of private equity mandates include Border to Coast, which last year launched a £5.7bn private markets programme, with Nest announcing a £1.5bn private equity mandate. Wales Pension Partnership joined in earlier this year by committing £500m to the asset class.
The growth in private equity also raises concerns about the role of ESG standards for privately listed firms, with those for engagement remaining more complex for unlisted firms. The FCA’s new anti-greenwashing rules will apply to any UK-authorised firm and, therefore, also private equity funds.
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