How to revive UK private equity

Author: Danielle Myles | Published: 1 Nov 2012
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More UK private equity house are tipped to diversify investment mandates after the sector’s deal volumes slid again last quarter.

Statistics released on Monday by BDO Stoy Hayward reveal that 77 private equity deals closed in the UK between July and September, marking the fourth consecutive quarter that deal numbers have dropped.

There are some bright spots for exit possibilities. But cash-rich corporates and tighter leverage means there’s no end in sight for the recalibration of buy-side strategies.

“There has been a trend for global private equity houses to diversify - the sectors that they cover, the geographies that they are looking at, and the investment positions that they take,” said Gavin Davies, London-based co-head of Herbert Smith Freehills’ international private equity practice.

The most radical departure is debt funds – Electra's acquisition of a £30 million subordinated debt portfolio in late September being a recent example.

Results of a law firm survey conducted last month predict that private equity will overtake banks as the main source of turnaround funding, which is a strong reversal from the previous year’s survey results.

On diversifying equity investments, Davies said certain parts of the market have proved more active than others: “One obvious case is distressed asset acquisitions.”

The Centre for Management Buy-Out (CMBOR) made a similar prediction in its Q2 report, which followed OpCapita buying Games Group out of administration in April.

Real estate, infrastructure, and smaller assets (that are approached on a buy-and-build basis) are also receiving a closer look.

Glimmers of hope

Exit opportunities have also been few and far between, forcing many firms to adopt a wait-and-see approach, according to UK private equity partners.

But there are more exit possibilities than on the buy-side. “There have been a few bright spots for private equity sellers, particularly Japanese and Chinese buyer interest,” said Davies.

“Asian buyers tend to approach deal execution differently, such that they are not always the most obvious buyers in a competitive auction process,” he said. “But outside of a formal process, in current markets Japanese buyers have been good buyers from private equity sellers through bilateral processes.”

CMBOR’s Q3 report, released last month, draws a similar conclusion and predicts that foreign trade buyers will buoy the UK industry.

Sachin Date, Ernst & Young’s private equity leader for EMEIA, commented on the report: “What we are seeing is a trend towards overseas buyers, which are keen to establish a foothold in Europe, acquiring UK PE assets to mitigate the risks and volatility currently associated with the eurozone.”

The moribund UK listings market has all but ruled out exits by way of initial public offering (IPO). RBS’s floating of Direct Line on October 11 is viewed by much of the market as a test for the market’s reopening.

Among the city’s lawyers and bankers, Direct Line has become the most anticipated IPO of the year.

But some are not convinced. Akin Gump Strauss Hauer & Feld’s Sebastian Rice said while he certainly hopes Direct Line boosts UK listings, it’s difficult for a sole deal to signal a market’s return.

“I’m slightly sceptical of IPOs being an immediate solution,” he said. “We’ve been waiting so long for the market to come roaring back and I’m not sure that one listing can change everything so dramatically.”

For more on private equity’s new strategies see:

‘KKR’s guide to responsible investment’ http://www.iflr.com/Article/3091887/Funds/KKRs-guide-to-responsible-investment.html

‘Why impact investing is the next corporate innovator’ http://www.iflr.com/Article/3104834/Funds/Why-impact-investing-is-the-next-corporate-innovator.html