Global law firm Mayer Brown has found that the total annual value of acquisitions of UK companies by US private equity funds jumped 53 per cent last year to GBP14.2 billion; up from GBP9.3 billion in 2018. It is the latest sign of favourable market economics in the UK, which has seen a widening valuation gap relative to European listed equities as the country has convulsed from the vacillations of Brexit.
Global law firm Mayer Brown has found that the total annual value of acquisitions of UK companies by US private equity funds jumped 53 per cent last year to GBP14.2 billion; up from GBP9.3 billion in 2018. It is the latest sign of favourable market economics in the UK, which has seen a widening valuation gap relative to European listed equities as the country has convulsed from the vacillations of Brexit.
Depressed valuations of UK companies has unsurprisingly made them an attractive relative value play for US private equity groups as they look beyond their own increasingly competitive domestic deal market. The valuation gap, according to Mayer Brown, will have impacted large UK private companies, as well as listed companies. It says that periods of more intensive Brexit jitters have, in retrospect, represented a good opportunity for PE funds to acquire high quality assets at low earnings multiples.
“We’ve suspected this would be the case given that we’ve seen a lot of US PE groups set up physically in London; not just to invest in the UK but to use it as a gateway for investing across Europe,” comments Perry Yam, partner and co-Head of the Global Corporate & Securities practice at Mayer Brown. “So it confirmed our suspicions. Competition locally in the US for transactions, together with a stronger dollar compared to sterling, means we are now seeing statistical evidence of US money flowing in to acquire competitive UK businesses.”
The research also shows that the value of acquisitions of UK companies by EU-based PE funds also increased to GBP1 billion last year, up from just GBP42 million the year before. Acquisitions by Chinese PE funds reached GBP515 million, up from a negligible value in the previous year.
Yam says there are still plenty of buying opportunities in the UK for PE funds.
“They can continue to draw on record levels of dry powder and access to debt is as abundant as ever,” he says.
A couple of notable acquisitions last year contributed to the year-on-year increase in deal values. These included the USD3.8 billion takeover of FTSE 250-listed software maker, Sophos Group by Thoma Bravo and the acquisition of defense contractor Cobham for GBP4 billion by Advent International.
Both are examples of FTSE 250-listed companies being taken private.
Asked if further take-private deals are likely in 2020 as the UK continues to work through agreeing a trade deal with the EU, Yam remarks:
“Yes, I would expect there to be continued interest in take privates in 2020. Companies listed on AIM and the FTSE100 are trading at discount to European companies and there are some very attractive deals for PE houses to consider in a period of greater certainty.
“The number of companies listed on AIM has shrunk over the last 10 years and the rate of IPOs has reduced proportionately. I think that’s because there’s been a poor return on public equities and that, combined with the fact that interest rates have remained low and will probably continue to, means that institutional investors have been favouring private markets, allocating cash to PE groups to go and buy businesses, which may include undervalued companies, to take private.
“My only word of caution, however, is that they are a) very expensive to execute; b) uncertain, and c) hard to execute, compared to a private transaction.”
Yam further cautions that people should not expect the M&A to suddenly race ahead. Valuations still need to be sensible and well founded for PE funds, he says, “and the last 12 months has seen weak trading for the UK economy – denting earnings’ growth and stretching valuations. Sellers will need to reflect that in their asking prices. “It will always be difficult for a business owner to accept their business is worth less than they had been told it was at the start of a sales process.”
A wall of money
One significant factor that might make the UK even more attractive to US PE groups – even if valuations start to tick upwards – is that the country is now entering a period of certainty, following Boris Johnson’s election victory last December.
“Interestingly, the recent events of the last few days with Boris Johnson appointing a new Chancellor is arguably evidence that this is a prime minister who knows he is in complete control,” says Yam. “He’s likely got two parliaments (or 10 years) in my view, during which he’s going to invest in large legacy projects that will leave his name on the map; HS2 is one example, there will be others.
“I think that most importantly, this is going to be a period of certainty, which the markets will like. I suspect interest rates will not come down and inflation will be sensibly managed, notwithstanding increased government spending.
“For all those reasons – and because PE groups have been sitting on so much dry powder during the recent period of uncertainty – you’re going to see a wall of money come to market in 2020 and 2021 and even more deal activity in the UK.”
PE firms who haven’t previously spent money could lead to more buoyant markets in Q3 and Q4 as they come under pressure to invest, he says.
Data shows that the value of acquisitions of UK companies by EU-based trade buyers last year was also high at GBP20.1 billion, up slightly from GBP20 billion in 2018 and GBP13.1 billion in 2017.
While US PE groups will likely continue to train their sights on UK companies, there is still no clear evidence that Chinese PE groups have sought to exploit undervalued opportunities over the last couple of years.
“Two or three years ago you might have asked when Chinese PE money will be coming in to the UK and the fact is, we just haven’t seen it yet, materially. I remain dubious as to whether this will actually happen in the short-term. What we have seen, undoubtedly, and at Mayer Brown we’ve been involved in a lot of them, is what are known as golden brick investments, where Chinese investors will buy landmark commercial buildings in the city of London and elsewhere.
“We see a lot of that deal activity in real estate but not in terms of investing in UK businesses,” concludes Yam.
