Are Private Equity Investments Gobbling Up The Public Companies In The United Kingdom?

Private Equity Landscape in the United KingdomÂ

The United Kingdom has established its place as the European Union’s largest private equity space in terms of deal value by a convenient margin, despite such a challenging economic as well as business environment, with a specifically robust fourth quarter of the year which amounted to more than half of 2019’s total value which was GBP 12.8 billion out of GBP 22.9 billion. In spite of a period of political and economic risks, such as the snap general election announcement as well as the ongoing confusion around the negotiations of Brexit, a rally of big deals meant that the United Kingdom registered a marginal year on year increase in deal value against a backdrop of Europe’s other major economies dropping from the pace they achieved at the end of 2018.

There was a reported slowdown in the number of private equity deals in the first part of 2019, primarily because of the uncertainty that had been created by Brexit, as well as the unstable UK Political scenario. The number of deals completed in the first half of the previous year was 384, down by 35.4 per cent year on year as compared to the first half of 2018. The deals completed were worth around £28.5 billion, a fall of 40 per cent year on year, as compared to H1 2018. The positives from the development were the fact that there was a gradual rise in terms of deal activity from 1^st quarter to the 2^nd quarter. The gradual rise towards the second quarter can primarily be attributed to the increase in the deal flow of the Mid Market Private Equity activities towards the second quarter of the year. In terms of deal types, Bolt On’s appeared to be the most important, making up 56 per cent in volume of all PE activities in the first half of the year, followed by Minority Stake buyouts, which made up for 19 per cent of all PE activity. Even though the signs were positives, but the risks and uncertainties associated with the private equity deal environment were expected to stay the same for the second half of the year.

The scenario changed by the end of the second half of the year, in which, despite the lingering risks associated with the geopolitical scenario of United Kingdom, Private Equity firms avoided shying away from entering into the buying mode. This was driven by the PE environment in all of Europe, which saw deal value cross the level of €100 billion, for the third consecutive year in 2019.

Rise of Public to Private Deals in the UK

Public to Private Deals (P2P) – A Public to Private deal is one where a PE fund or a group of PE funds, purchase all the equities of a Publicly traded company.

As per some estimates, in the year 2019 there was a significant increase of around 40 per cent year on year in the public companies choosing to leave the stock exchange and operate as private firms. This number went from 20 in 2018 to 28 in 2019 as per reports. The value of these deals also surged by around 113 per cent year on year from £9.9 billion in 2018 to £21.1 billion in 2019. It has been a consistent scenario since the end of 2018 and one that gives no indication of losing the pace soon, with Private Equity consortiums, frequently with other longer-term funds and pool of private capital investing along with them. It demonstrated an expanding willingness to make offers for publicly traded companies, regardless of the overall macroeconomic downturn or the size and complexity of the deals.

Another important factor has been that firms, in the current uncertain environment, are not very confident about getting listed. This was evident from the fact that the new listings in the UK market over the last year were just 34, the smallest number since 2009, which was in the middle of the global financial crisis. The new listings value in the United Kingdom market were down by almost 50 per cent in 2019 to just £3.7 billion.

Various research and legal firms believe that this activity of new listing reducing and the number of firms choosing to go private from being public is expected to continue, primarily because of the low share prices and interest rates, as well as the massive amounts of capital being brought in by the Private Equity firms.

Major Deals of 2019

The environment at the end of 2019 for Private Equity firms was robust, here we will discuss two major deals that took place during the year that were also in the spotlight for various other reasons. British defence company Cobham was acquired by the US based Private Equity Group Advent for an all-cash deal amounting to £4 billion pounds. Though, the move was halted by the British Government on 17^th September due to the security risks that this deal presented and handing over a major defence equipment provider to the US based company was a major red flag cited. However, after reviewing the entire situation, the government gave a go-ahead to the deal in the month of December, paving the way for one of the biggest defence private equity deals in history, which could have major business as well as diplomatic implications.

Another news from the Private Equity space came from the US based Kohlberg Kravis Roberts (KKR), which raised a massive amount of £5.0 billion (€5.8 billion), to launch its flagship fund to make private equity investments in Western Europe. The company had made 28 per cent of the total fund’s worth of capital commitment, even before the fundraising closed in the month of November, showing the company’s aggressive strategy for the region.

Outlook for Private Equity in 2020

Even though the current Private Equity transactions in the United Kingdom are on the rise, despite the difficult geopolitical situations, but if a number of segment experts are to be believed, the Private Equity fundraising for 2020, might drop year on year as compared to the record levels achieved in 2019. The experts believe that this fall will primarily be from the viewpoint of matching the record performance that the sector delivered in 2019. Even though the performance will be strong in comparison to any other year, but it’s a fact that no PE Firm is targeting more than US $10 billion in deal value for the year. The primary target for these firms this year would be to hold on and consolidate on the operations of their well-performing assets throughout the year.

Overall, 2020 is expected to be a strong year for the Private Equity space, with some important deals already in the pipelines, but if it will match up to the record levels of 2019, especially once the formal exit of the United Kingdom from European Union is complete is still to be seen.

Â