After the economic slowdown from the 2020 COVID-19 pandemic and despite the continued shutdowns that have followed due tothe Delta variant, the United Kingdom has become one of the most active European buy-out markets, seeing a 60% increase in 2021 buy-outs over those seen in 2020. In fact, data from Refinitiv, a P.E. deal tracker, shows that 2021 has seen over 400 deals closed, worth over $50 billion USD (£36.7 billion). The highest full number it has seen since it first started collecting the data in 1996. The next best year was in 2018, with only 297 deals completed at the same period and 402 for the year; 2021 is expected to smash that record.
According to London-based Private Equity firm HULT Private Capital’s Amrit Singh, this Private Equity activity increase has been driven primarily by a resurgence in U.K. market public to private transactions. Singh said, “The number of approaches that Private Equity has made toward United Kingdom listed companies has almost tripled since the previous year. These approaches, toward companies that all U.K. residents will know, are going the distance, with deals closing.”
The surge that Singh and other investors have seen has been driven by company valuations that are relatively low when they are compared to regional and global markets. The current (early October 2021) FTSE all share Price to Earnings ratio (a simple valuation metric) stands a 14.97, while the S&P 500 (the U.S.’s large-cap benchmark index) is more than double at 34.05.
These low valuations of post-pandemic publicly traded companies have attracted the eyes of foreign investors who are seeking better returns on their investments. This attribute is combined with interest rates that have continued to stay low in order to stimulate global economies through the Covid recovery. Low interest rates make cheap debt plentiful, or as people in P.E. like to call it, plenty of dry powder, for private equity firms to deploy and obtain underpriced assets that have relatively little competition for them in the public markets. This lack of competition has meant very few contested bids once an offer has been made and is recommended by a takeover candidate’s board of directors. This recommendation is combined with a U.K. takeover code that is more favourable to buyers than similar codes found in other European countries.
With this compilation of traits, the trend of P.E. buying public companies and then taking them private is expected to continue through the end of 2021 and beyond.
Where are the hot sectors for P.E. Investment?
According to HULT Private Capital, the tech and healthcare sectors will continue to attract the United Kingdom’s highest valuations, with the EBITDA multiples of the technology sector at 20 times and healthcare on average being 50% higher than what was seen in 2019. Tech and healthcare have seen “dipping down” by a few of the large P.E. funds which have been prepared to spend significant funds on hot mid-market companies, where continued growth potential is easier to see, the potential of their assets can be visualized, and the business can be scaled either on their own or with complementary bolt-on assets.
This is a resonating trend of seeing private equity firms acquiring a broader platform of assets and creating a better economy of scale by bolting on smaller businesses, where the sum of the parts looks like a much better value than the separate entities would on exit. While this can be done through public company mergers, sometimes boards and executives can not see the bigger picture or are even resistant to it. This image of combining assets is also more palatable than the image that many P.E. firms have of raiding and breaking up companies, firing employees, and selling off the parts that remain.
Additional sectors such as consumer, chemicals and industrials, construction, and business services have all become very active, attracting attention and investment from private equity firms in 2021. Finally, the other sectors that are expected to see more movement in private equity are in travel and hospitality and other post covid recovery sectors that benefit from a vaccinated world like restaurants, gyms, and real estate. The P.E. transactions have been relatively subdued in these areas, becuase the companies have been able to remain operating by taking advantage of the various governmental schemes that have been available as well as changes to the U.K.’s insolvency laws during covid which prevented several of these businesses from falling into insolvency. These companies will become P.E. targets as their balance sheets will need investment to be repaired.
Private Equity has also targeted environmental, social, and governance (ESG) investments in the U.K., with recent studies showing that 2/3rds of P.E. firms taking ESG principals into account when seeking takeover targets, with half of the P.E. firms posting their ESG policies. There has not been any published evidence that above-average returns have resulted from ESG investments; only anecdotal evidence has been stated to date. However, companies with sound ESG principles think in the long-term, which is a better investment horizon and will remain a requirement for P.E. investment.
HULT Private Capital’s Amrit Singh’s final words on the world’s view of the U.K. for P.E. investment were as follows, “Brexit’s impact was fortunately overshadowed by the Covid pandemic. We are interested to see if there will be a real impact once the post-Covid vaccinated world takes shape and we realize a new normal. We at HULT expect a continued hot P.E. market in the U.K. until equity prices rise in line with the U.S. and other markets or the price of borrowing gets too high. Until then, we are very confident of the returns for our clients.”
We are looking forward to seeing how this already record year for P.E. takeovers ends. Until then, we will just keep watching the deals happen. If the first three quarters indicate how the final quarter will go, the sky is the limit.
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