Private capital
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13 Sep 2024
Insight
What have been the key dynamics in UK private equity in recent years?
It’s a continuation of a secular trend towards a deepening and broadening market. Funds have moved from predominantly sector agnostic to following more focused strategies. They're also more willing to take a closer operational view of managing the assets and work in tandem with their management teams.
It goes to a fundamental point of the value-add that private equity brings to any situation. Funds are having to sharpen their focus on what they bring to any given asset as there is a lot more competition for deals and capital pouring into private equity than there used to be. A deep understanding of the sector is important, as is an ability to bring a lot of financial firepower, so we are seeing a trend towards larger sponsors attracting more capital. Often those sponsors will have more specialised funds within their umbrella so their teams will be sector focused in a way they wouldn't have been a few years ago. It's largely funds looking to answer the question: how do we make the kind of returns we want in an increasingly crowded market?
How well is London retaining its position as a leading private equity hub in Europe?
UK private equity benefits from the fact that the City of London is one of the two pre-eminent financial centres globally, alongside New York. London is head and shoulders above any other rival European financial centre and that brings a natural strength that you'd struggle to replicate anywhere else. It's instructive that even after some political instability and Brexit, funds are still choosing to make London their main centre in Europe and looking to open in London even in the last few years. We are certainly seeing London maintaining its position as the preeminent hub in private equity. If anything, it's strengthening.
It's been a period of some market upheaval – how are deal structures and tactics evolving?
We saw a wave of private equity activity that started shortly after the first lockdown hit, so it was very busy in the second half of 2020. 2021 was at another level. There was a natural pause in 2022 as people digested acquisitions and 2023 was fallow largely because uncertainty in where interest rates would go made it difficult to agree pricing.
That persisted in the upper end of the market until earlier this year; the mid-market is still taking its time to unwind. Sellers have a lot of assets that they have struggled to sell over the last 18 months because the market wasn't friendly. And we've got a lot of investors with dry powder they need to deploy. Buyers and sellers realise they need to start doing deals.
What impact will expected UK policy changes like phasing out non-dom status and overhauling tax of carried interest have?
The rate of tax on carried interest was set with a view to attracting private equity investment into the UK and enhancing the attractiveness of London as a hub for investment. There is the question of what the effect of raising the rate will be on the willingness of managers to remain in London and put their own capital at risk. The jury is still out but London will still retain a lot of natural advantages that may be a lot more important for investors than the exact rate of tax.
We have just seen the first change in government for 14 years in the UK. How will the industry react?
Any change of government is going to be unsettling in that it takes a while to get to grips with the look and feel of a new administration. There are some policy changes private equity will be focusing on but there is another way of looking at it, which is after a significant degree of political instability, we still have a government that understands the point of investment and the benefit that private equity brings to the wider economy.
The gradual increase in activity in UK private equity investment will continue. It's hard to see how that will run out of steam anytime soon. There are still a lot of buyers with capital to deploy and a lot of sellers ready to sell at the right price.
John Taylor, Partner
What policy changes would be most helpful from the new UK Government in terms of the private capital sector?
The government made it clear during the election campaign that they were economically and financially orthodox. And they have been emphasising the need for economic growth. If they can follow through on that, it is likely to give the private equity industry some comfort. It's more stability and steadiness the industry is looking for rather than any particular policy.
Sponsors are facing the end of ultra-low interest rates and a more challenging market for exits. How do you see funds adapting?
Private equity has historically managed to succeed in varying interest rate environments, including before the financial crisis when interest rates were around the same level as now. Clearly, higher rates have an impact on returns or the prices investors are willing to pay for assets and this comes back to the point that investors are asking themselves: what value are we bringing to our investment? Leverage was one significant value factor but when leverage is more expensive sponsors must look at other factors, such as operational expertise or sector focus. The fact there has been so much capital available in recent years has meant strategies have had to become sharper anyway and higher rates mean they'll have to keep this up. But that doesn’t betoken a sea change in how they do things. It's calibration rather than revolution.
Even after some political instability and Brexit, funds are still choosing London as their main centre in Europe. We are seeing London maintaining its position as the preeminent hub in private equity. If anything, it's strengthening.
What will be the key trends to watch?
The gradual increase in activity in UK private equity investment will continue. It's hard to see how that will run out of steam anytime soon. There are still a lot of potential buyers with capital they want to deploy and a lot of sellers are ready to sell at the right price.
John Taylor will be chairing a debate on the UK deal market on 18 September at the Private Equity Europe Forum in London
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