UK consumer deals slump as GPs heed Brexit warnings

Despite the volatility in the lead up to and aftermath of the UK's EU membership referendum, the country's buyout market remained relatively resolute in 2016. In particular, the lower-mid-market performed strongly, with the number of deals valued at £50-250m increasing from 53 in 2015 to 65, according to unquote" data. Similarly, while the £6.5bn changing hands in the £50-250m bracket marked a 6% year-on-year decrease, the total was significantly higher than the £5.5bn seen in 2012 and £6.1bn recorded in 2013.

Yet, with a dearth of large-cap deals in 2016, aggregate value within the consumer goods and services space experienced a 19% year-on-year slump in 2016 from £9.1bn to £7.4bn, marking the lowest figure since 2012.

Furthermore, excluding deals in the travel and leisure segment – which proved particularly attractive following the devaluation of sterling – there was a 21% decrease in aggregate value from £2.7bn in H1 2016 to £2.1bn in H2. This is notable as each half-year period coincides with the phases before and after the referendum. Travel and leisure, meanwhile, returned to 2015 levels following a drastic drop in the first half of 2016, with £2.5bn in H2 marking an 11% increase on H2 2015.

"After Brexit, all the forecasters were saying the consumer sector wasn't going to do so well. It could be that private equity houses were listening to those economists" – Tim Hewens, Squire Patton Boggs

The consumer sector's slump is somewhat counterintuitive, given it has been widely credited as the reason for the UK's surprising economic resilience following the Brexit vote. Indeed, in November 2016, consumer spending increased by 3.2% year-on-year, according to Visa's UK Consumer Spending Index, representing the fastest rate of growth since January 2015. On the surface, it would appear the space remains well-positioned for future growth and should therefore represent a credible investment proposition.

However, economists had widely anticipated a severe drop in consumer confidence in the event of a UK vote to leave the EU. "After Brexit, all the forecasters were saying the consumer sector wasn't going to do so well," says Tim Hewens, head of UK private equity at Squire Patton Boggs. "It could be that private equity houses were listening to those economists and thinking: 'I may want to hold off investing in a space that everybody's been saying is going to drop off a cliff, even though I'm not actually seeing it myself in the numbers yet'."

Inflation ahead
Since Visa's UK Consumer Spending Index was released, however, retail sales have shown signs of slowing down. In February, the UK's Office for National Statistics released a report stating seasonally adjusted sales figures excluding fuel were 0.2% down in January compared to December, marking a second month of slowing growth.

Additionally, the Bank of England is predicting CPI inflation of up to 2.7% by the end of 2017 and a decline in wage growth from 2.7% to 2.2%. Such a combination would likely have a detrimental effect on consumer spending. It could prove private equity investors have displayed admirable discipline when faced with impressive short-term consumer spending figures.

Callum Bell, head of corporate and acquisition finance at specialist bank Investec, also argues the drop in activity could be attributed to the fact the segment is somewhat overdue a cyclical downturn. Private equity investment in consumer goods and services has been buoyant in recent years, according to unquote" data. Indeed, the 71 buyouts that took place within the space in 2014 marked the highest level of activity since 2007, when 90 such deals were completed, while the aggregate deal value of £9.1bn in 2015 was also the highest total since before the financial crisis.

Says Bell: "After a very strong run of consumer spending over the past three to four years, you're seeing people asking: 'How long can the sustained growth in consumer spending be maintained?' If you look at factors such as personal debt on credit cards, it's at an all-time high. So investors are rationally taking a step back to reassess opportunities that are highly correlated to consumer confidence after a period of high spending."

With the outlook for consumer spending beginning to look less encouraging, it could well be that by holding back on investing in the space, private equity investors have dodged a potential bullet.

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• Topics
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