Why the midmarket is a fertile ground for private equity
Authors:
A double-whammy of Brexit and the pandemic have depressed valuations in the UK, triggering private equity groups to bid for public companies at the fastest rate in history.?According to Refinitiv, PE firms have bought or announced bids for 366 UK companies so far this year.??
The largest and highest profile deal so far this year is Wm Morrison, which is the subject of a competitive bid led by US investment manager Fortress, valuing the company at ￡9.5 billion, trumping that of Clayton, Dubilier & Rice, with Apollo in the wings, alongside perhaps others who have not yet identified themselves. Whilst that might easily be the largest deal so far, well-known names such as the AA, G4S, TalkTalk, Signature Aviation, John Laing, St Modwen Properties, Vectura have attracted PE offers in recent times. The trend shows no sign of abating as we move in to H2 of 2021.
The usual opponents, such as the Daily Mail, continue to set its stall out against what it calls “ruthless” and “predatory” dealmaking.?But taking aside the rights and wrongs of national ownership, this huge swathe of private capital should play a major part in assisting many businesses to survive, grow and flourish in the post Covid world.?Private equity firms and their investors will no doubt play a key role in rebuilding our recovery as lockdown restrictions ease and all social distancing measures being dropped on 19 July.
However, Morrison’s aside, it is in the midmarket where we have seen a huge volume of funds that have successfully closed new funding vehicles and where we are seeing the greatest amount of deal activity. Bids for UK companies have come largely from overseas PE funds – Blackstone, Apollo, TDR, KKR et al – because firstly, the UK midmarket is by some estimates and measures roughly 10-15% cheaper than global peers; secondly, companies in this segment are de-risked compared to juniors;?thirdly, they tend to be less complicated than juniors and fourthly, the UK legal and corporate structure is well understood, penetrable, less exposed to government interference and generally encouraging of an outward growth as compared to other states.
It is notable that UK PE has not yet pursued such transactions with Proactis, Telit, and Anexo being the only obvious examples. The advantageous currency exchange rates may not be as apparent as they are for overseas investors, but the pressure to deploy funds given that fundraising has outrun deployment by private equity funds for around a decade, and boxing clever around the furious competition for high quality assets in the private markets, is the same. Anecdotally, it is clear from our conversations with sponsors that any traditional reluctance to engage with the public markets, for fear of costs and complexity, has passed.
Therefore, the reluctance may be a function of price, risk or stage of development profile that does not fit a standard PE fund. It is certainly not through a lack of enthusiasm or interest. It will be interesting to see if this reticence remains or whether the PE firms will start to climb down the scale in search of investment opportunities.