The UK’s economic growth will be outpaced by all other G7 advanced nations this year – and Brexit remains the single biggest risk on the horizon – according to new research from Lloyds Bank Commercial Banking, which canvassed the views of leading financial sponsors.
Speaking to financial sponsors as part of the bank’s annual Financial Institutions Sentiment Survey, the research found that more than half (57 per cent) of private equity firms are worried that UK economic growth will be weaker this year than in any of the other G7 nations – a dramatic worsening of sentiment compared to 2017 when just a sixth (15 per cent) of the PE industry held that view.
Half of the financial sponsors surveyed say they expect UK growth to stay at 2017 levels, while around four in ten (43 per cent) expect it to worsen and only 7 per cent believe growth will improve.
Stephen Quinn, Managing Director, Head of Financial Sponsors, Lloyds Bank Commercial Banking, says: “The UK’s private equity community is finely tuned to the impact of the nation’s economic prospects on their investments, so it’s telling that fears over the uncertainty caused by Brexit is topping their list of concerns as we edge closer to March 2019”.
“Our findings suggest there is a real risk that our growth will be slower this year than in all other advanced nations; and that we will fall to the back of the G7 pack. It is, however, encouraging to see the majority private equity houses believe the UK economy will prove to be resilient and that it will come through the challenges relatively unscathed.”
The risk weighing most heavily on the minds of UK based private equity houses is Brexit. Half of the firms surveyed say they are worried about the effects of leaving the EU. Two fifths (38 per cent) are now less optimistic about Brexit than they were 12 months ago, while two thirds (62 per cent) say their opinion has not changed.
Firms across the private equity sector remain relatively upbeat about their own prospects for the coming year. More than a third (38 per cent) expect revenues to increase this year, and most expect domestic headcount (69 per cent) and business investment in the UK (46 per cent) to remain stable. However, six in ten (61 per cent) expect their cost base to rise.
By far the biggest strategic priority for the sector, ranked as the number one aim for two thirds (64 per cent) of all private equity firms interviewed, is organic growth, but other areas of focus for the year ahead include expansion within core markets (36 per cent) and introducing new products and services (28 per cent).
Despite clear worries about the risks of Brexit, the vast majority of private equity houses (82 per cent) believe the UK will remain the most prominent hub for financial services in Europe once the UK leaves the EU.
Most firms (57 per cent) say they are not thinking about moving any of their operations, but just over a third (35 per cent) are considering a move.
Quinn adds: “The headwinds of economic and geopolitical uncertainty mean choppier waters for the sector in the months ahead. But, despite a lack of clarity over the final Brexit deal, the private equity community is upbeat about its growth prospects and long-term future.
“Private Equity managers have, for some time, proven themselves highly adaptable in challenging external conditions and I expect them to continue to do so”.
