UK consumer sector maintains appeal in H1

The UK buyout market performed strongly in H1 2018, despite the macroeconomic and political uncertainty facing the country. While dealflow and aggregate value fell below the levels seen in each semester of 2017, they were still above those of any other half-year period since H2 2014, according to Unquote Data. There were 104 buyouts for an aggregate value of £13.8bn between January and June, compared with 120 totalling £14.4bn in the same period last year.

Activity in the consumer space was remarkably resolute despite mounting troubles on the high street, with 27 consumer buyouts worth an aggregate £3.7bn. While the combined value was drastically down on H2 2017's total of £9.8bn, figures from the second half of last year included the €6.8bn buyout of Unilever Spreads by KKR. Overall, the aggregate value compared far more favourably with the five-year average of £4.8bn per semester, while the 27 deals were also only just below the average of 32.

Equally as surprisingly, the consumer space was the joint most expensive investment arena for private equity across the six quarters to Q1 2018, according to the latest Clearwater Multiples Heatmap report. The research found that private equity backers are paying an average entry multiple of 10.6x for businesses in the space, a figure matched only by companies in the financial services sector.

"Many of the very public casualties have been the result of over-optimistic growth plans, too much leverage and tired concepts losing favour with the public, particularly as millennials form an increasing proportion of the national consumer spend," says LGB Corporate Finance managing director Angus Grierson. "There are still many differentiated concepts that have strong growth prospects and they are rightly attracting private equity backing on a continuing basis."

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Additionally, the troubles facing the sector are presenting opportunities for special situations investors with the specific remit of repositioning outdated business models. One such case was Hilco Equity Partners' acquisition of Homebase from trade vendor Wesfarmers in May. The vendor said at the time that the Homebase brand could "return to profitability over time", but that this would require additional capital investment.

"For special situations or turnaround investors, ongoing macroeconomic uncertainty represents a certain level of opportunity, as do the structural changes that are taking place in many industries," says Tristan Nagler, managing director and UK head at Aurelius Equity Opportunities. "Retail, for example, is going through a perfect storm driven by shifting consumer habits - particularly the move to online shopping - rate issues, pervasive rent challenges, living wage and consumer spending reticence."

For special situations or turnaround investors, ongoing macroeconomic uncertainty represents a certain level of opportunity" – Tristan Nagler, Aurelius Equity Opportunities

However, statistically the key driver behind private equity investment in the consumer space in H1 has been the travel and leisure segment. In the 12 months spanning H2 2017 and H1 2018, buyouts in the travel and leisure space accounted for 32% of consumer sector dealflow, according to Unquote Data, up from 26% in the previous 12 months. General retailers, by contrast, accounted for 21% of consumer sector dealflow from H2 2017 to H1 2018, compared with 33% in the previous 12-month period.

"Activity-based leisure concepts is an area that is increasingly popular," says LGB's Grierson. "The overall trend is that people are becoming more interested in their health and well-being, and are allocating more of their resources towards that. The UK holiday park space is also a very interesting area. It is possible to create an investment case around people tightening their belts with regard to overseas holidays and therefore looking for interesting domestic options. At the other end of the scale, there is also a strong level of transaction flow for premium international tourism providers, which is less impacted by wider consumer confidence."

Indeed, H1 has seen three substantial deals in the travel and tourism segment: Vitruvian Partners' acquisition of Travel Counsellors from Equistone for around £250m, Livingbridge's acquisition of Love Holidays for a reported £180m, and Platinum Equity's acquisition of Wyndham Worldwide Corporation's European holiday home rental business for $1.3bn.

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