What’s New and What’s Next in UK Private Equity

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After the COVID-19 slowdown in 2020, the United Kingdom has been one of the most active buyout markets in Europe, with a 60% rise in buyouts in 2021 compared to 2020.

This increase in activity has been driven in part by a resurgence in public-to-private transactions in the UK market. The number of approaches made by private equity to listed companies in the United Kingdom has almost tripled since last year, with household names now being targeted. This surge has been driven by relatively low valuations of publicly listed companies post-pandemic, continued low interest rates and the plentiful availability of cheap debt, private equity having ample dry powder to deploy, the relative lack of competition for assets in the public markets with very few contested bids once an offer has been recommended, and a takeover code that is more favourable to buyers compared to the equivalent in other European markets. This trend is expected to continue for the rest of 2021 and beyond.

In Depth

The technology and healthcare sectors continue to attract some of the highest valuations in the United Kingdom, with EBITDA multiples averaging 20 times in the technology sector and multiples in healthcare being on average 50% higher than they were in 2019. These sectors have also seen some “dipping down” by one or two of the large buy-out funds, which have been prepared to splash the cash on hot mid-market assets where they can see the continued huge growth potential of these assets and the ability to scale these businesses and bolt on complementary assets. This is resonant of the continuing trend in private equity to acquire platform assets and bolt on smaller businesses, where the sum of the whole has proved to be much greater than the sum of the parts on the eventual exit. Other sectors such as consumer, industrials and chemicals, construction and business services have also been very active and have attracted significant investment from private equity sponsors in 2021.

Other sectors that are expected to see a return to private equity investment in a COVID-19-vaccinated world include the hospitality, travel, leisure, airline, transport, hotel, events, restaurants, gym and real estate sectors. Transactions in these areas have been relatively subdued during the pandemic for obvious reasons. Companies still operating in these sectors have survived by taking advantage of Government schemes where available and have also been helped by beneficial changes to UK insolvency laws which have prevented many of these businesses from being pushed into insolvency. In many cases, such companies will need investment to repair their balance sheet and we should therefore see more private equity transactions in these sectors going forward.

There has been a growing focus on environmental, social and governance (ESG) investments by the UK private equity community. Based on recent studies, almost two-thirds of UK private equity firms now take account of ESG principles in their investments, although only half that number actually publish that ESG policy. Anecdotal evidence from UK entities suggest that investments which have been driven by good ESG principles have performed better than those that haven’t, so we would expect the trend to continue and to see an increase in both numbers. Increasing numbers of investors in PE funds are also now demanding that sound ESG principles be factored into funds’ investment decision-making.

The impact of Brexit has generally been overshadowed by the impact of the pandemic, so it will be interesting to assess the real impact of Brexit versus COVID-19 once the post-vaccination world has taken shape and things get back to “normal”. Overall, the United Kingdom will continue to remain an attractive country for private equity investment.

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