Why Cash-Rich Private Equity Firms Are Scouting For The Right Business In The UK | Capital investment
Take-over bids from private equity firms have become so common this year that even investment bankers are starting to look tired. “Another week, another private equity offer,” was how analysts at Canaccord Genuity reacted to the weekend’s news of an approach for Morrisons.
The supermarket has rejected the £ 5.5bn offer from US buyout firm Clayton, Dubilier & Rice, but investors expect a bidding war. It won’t be the only one, as private equity firms sitting on huge piles of money look to the UK.
Private equity firms have announced 113 deals for UK firms (both takeovers and minority stakes) worth a combined £ 23.3 billion so far in 2021, according to the firm. Dealogic data. It is the fastest negotiating pace since 2007, just before the financial crisis, he said.
They are coming in droves and quickly. Texas-based private equity firm Lone Star Global upped one of the deals on Monday, saying it would give UK aircraft parts maker Senior £ 839million. Another American company, Bridgepoint, has announced that it will take a minority stake in Itsu, the Asian-inspired food chain.
Morrisons rival Asda last week received regulatory approval for a debt-financed takeover by British billionaire Issa Brothers and private equity firm TDR Capital. Other UK companies taken over by private equity firms in 2021 include St Modwen Properties, private jet firm Signature Aviation, fund administrators Sanne and Equiniti and infrastructure investor John Laing.
Buyers of private equity invest money on behalf of investors such as pension funds and often raise debt to fund their buyout operations. They come in all shapes and sizes, from companies that take over small, unlisted businesses to ‘barbarians at the door’ – big hitters like KKR and Blackstone – who can borrow billions to mount big deals and take big bucks. private companies, whether the advice of the targets agrees or not.
This is what happens after a takeover bid that often puts private equity in the spotlight. Private equity firms typically aim to reverse the investment within three to five years – via a sale or a public listing – meaning the focus can be on how to generate quick returns rather than a long term investment.
One controversial tactic may be to cut costs – often in the form of layoffs – while another is to look for assets to sell. Susannah Streeter, an analyst at investment platform Hargreaves Lansdown, pointed out that Morrisons buyers may look to sell its stores and then rent them out. Sale-leaseback agreements can be an easy way for a business to raise money to finance its growth – or a quick way for owners to generate cash for dividends.
Another common feature is the use of debt to finance acquisitions. The conditions have been ripe for private equity since the 2008-09 financial crisis, when central banks cut interest rates and further reduced borrowing costs by printing money through quantitative easing.
Even last year, despite a brief hiatus at the start of the pandemic, there was an increase in activity as central banks stepped in to support markets. Buyback deals worth $ 592 billion (£ 425 billion) were reached around the world during the year, up 8% from 2019 despite the pandemic, according to data from the Bain consulting firm.
Amid the global glut of private equity money, the UK has gained a reputation for good business, in part due to particularly British circumstances.
Neill Keaney, a debt analyst at the credit rating agency Creditsights, said UK companies were “very much in the sights of foreign suitors as Brexit weighs on valuations and stock prices”.
The attractiveness of UK businesses to overseas buyers was aided last year by the weakness of the British pound, in part due to the same Brexit uncertainty, although the British pound has since recovered against the dollar. American.
UK business buyouts have raised fears of a string of costly business bankruptcies as corporate debt catches up with them. Yet it has proven difficult to mobilize political action against private equity, in part because governments are keen to encourage investments that can save struggling businesses.
The Conservatives have so far fought back rumors of tax increases targeting capital gains loopholes that mean private equity income – “deferred interest” – is taxed significantly less than normal income.
Labor is revising its policy on private equity offers and may consider calling on buyout companies to provide details ahead of certain takeovers on their plans for the company, how they will treat employees and how for which they will continue to finance commitments such as pensions.
Private equity firms charge investors high fees – up to 20% of profits – in return for outperforming other investment categories, but there are signs they are struggling to achieve this. A study by Josh Lerner of Harvard Business School and Bain found that private equity generated an annual return of 15.3% over the past 10 years through June 2019, slightly behind the 15.5% offered by investing in the S&P 500, the main benchmark for US listed companies. .
A report by JP Morgan released last week suggested that fundraising could slow. “Dry powder” – money raised by private equity groups but not yet spent – hit an all-time high in late 2020 as investors like pension funds and insurers struggled. difficult to find investments generating a sufficient return.
Analysts at the bank wrote: “There could be some reversal from the cheap, low volatility credit environment we’ve seen in recent years, which has greatly benefited private equity markets, towards an environment. more volatile with an increased cost of long-term investments. financing. ”This might suggest that the days of easy money for private equity may be numbered.