Calm before the storm? Private equity deals come roaring back after subdued start to the year
Private equity deals in the UK slumped to their lowest level since 2020 in the first quarter of the year – but analysts are predicting it may just be the calm before the storm.
The total value of deals announced in the UK between January and the end of March came to just £27.1bn, the lowest total since the third quarter of the 2020 when markets were still roiled by the impact of Covid lockdowns, according to data analysed by Pitchbook for Morning Wire
The early 2023 slump came after a torrid year for dealmaking in 2022 as the shocks of war in Ukraine sent markets into a spin and soaring interest rates shut off debt financing for prospective buyers.
Dealmaking fell sharply through every quarter of 2022, tumbling from £65.8bn in the first quarter of the year to £32.8bn in the final three months of the year, according to Pitchbook’s figures.
However, analysts have predicted the early 2023 lull may precede a flurry of dealmaking in the UK as buyers capitalise on valuations still weighed down by the impacts of Brexit and fears over the UK’s stagnating economy.
“There’s definitely been a surge in private equity activity [since the start of April] ,” Henrik Persson, head of PLC Advisory at City broker investment bank Finncap, told Morning Wire.
“You would expect that as there seems to be a sense that interest rate rises are peaking, business sentiment and confidence not as bad as expected, and that this has not yet been fully and universally priced into the stock market (even if the FTSE100 has largely recovered) so there are still some very attractively priced assets.”
Flurry of private equity deals
The predictions comes after a surge in takeover activity in recent weeks as buyers swoop in on London-listed firms.
Payments giant Network International and smart metering firm Sureserve both fell into the sights of private equity last week, while e-commerce firm THG and veterinary medicine maker Dechra were on the receiving end of takeover bids earlier in the month.
Yesterday, London-listed diagnostics firm Medica became the latest company on the receiving end of a private equity bid, as UK firm IK Partners tabled a £269m offer.
Persson said “blockbuster valuation deals” were still missing but the possible £4.6bn bid for pharmaceuticals firm Dechra could be the largest public to private deal since the takeover of Morrisons in late 2021.
Deal lawyers at Dechert told Morning Wire said the UK would likely now experience a sharper uptick than other markets due to weak currency and the relatively low price tag still hanging over London-listed firms.
“I expect these [recent deals] would have been under consideration for a while during Q1 until the deal teams decided the time was right to progress with the transactions,” Christopher Field, co-head of Dechert’s private equity practice, told Morning Wire
“However, the recent surge in UK take privates doesn’t necessarily herald a meaningful increase in activity more generally, as it is driven by lower UK public market valuations and in some cases longer-term exchange rate differentials.”
Cheaper debt and dry powder
Private equity firms are estimated to be sitting on huge mounds of unspent cash raised prior to the downturn last year, which could fuel takeovers this year. A report from Bain & Co found that the industry was sitting on some $3.7tn of dry powder at the end of 2022.
Inflation is also expected to cool, triggering an end to the rapid rate hikes which have pushed up the cost of cash for potential private equity buyers.
Susannah Streeter, head of money and markets at Hargreaves Lansdown said a return of cheaper money could herald renewed fervour from dealmakers for “cheap” UK firms.
“We could even see an upswing of activity as the year progresses,” she said in a comment.
“Even though another rate hike is expected from the Bank of England in May, with inflation to fall back more sharply in the second half of the year, there is an end in sight to higher borrowing costs, which could propel more deals.”