H1 Review: UK transactions hit by Brexit impact

Kenny Wastell
14 August 2019

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The first half of 2019 appears to have been the semester in which Brexit finally caught up with UK private equity activity. Kenny Wastell reports

H1 2019's total of 96 buyouts recorded by Unquote Data marks the lowest volume seen in the country since the first six months of 2016, and a significant fall on the 111 in the preceding period. At £10.5bn, aggregate value also reached its lowest level since the first half of 2016 and the second lowest figure in the last 10 half-year periods.

"There have been multiple reports on the risk of recession in the UK," says Sovereign Capital partner Dominic Dalli. "There is an element of caution in the market, particularly in some of the more volatile sectors, where some businesses are experiencing delays or significant downturns in business. It is likely that overall deal volume is down because of that caution and the backdrop of Brexit."

Dalli says the B2B and essential services spaces – where Sovereign primarily focuses – have been somewhat sheltered from wider macroeconomic and political uncertainty. He explains that the GP has met its ongoing target of investing in four or five platform deals over the course of the last year.

"We are a predominantly services-focused fund, so very few of our businesses are directly reliant on the transfer of goods from the UK to mainland Europe or vice versa," says Dalli. "But distribution businesses and component-reliant businesses are facing an uncertain future. The travel and leisure space is also struggling, with outbound travel companies impacted by Brexit-related currency devaluation and domestic holiday parks seeing people defer decisions on high-ticket sales, such as new caravans or lodges."

Indeed, UK buyout dealflow in the travel and leisure segment fell to a five-year low of just five transactions in H1 2019, falling short of the joint-lowest total of six witnessed in the previous semester. Similarly, buyout activity in the consumer goods space remained suppressed. The total of seven such deals was just one above the five-year low of six seen in each of the two preceding half-year periods and significantly below the peak of 13 in H2 2014.

No let up on the exit front
UK exit activity also fell in H1 for the second half-year period in a row, according to Unquote Data. There were just 86 divestments between January and June 2019, compared with 104 in H2 2018, and 138, 126 and 124 respectively in H1 2018, H2 2017 and H1 2017.

"Following the Brexit referendum and the resulting uncertainty, mid-market private equity firms sought to realise their prime assets and became net sellers of businesses," says Alantra partner Steve Currie. "As a result, their portfolios shrunk, and the average life of a private equity portfolio is now at an all-time low. In 2017 and H1 2018, the best private equity assets were sold with valuations exceeding the previous peak in 2017. During the second half of 2018, private equity investors saw the opportunity to bring forward 2019 sales processes, avoiding risks around the initial EU exit date of 31 March 2019. Q1 2019 deal volumes were negatively impacted by this."

Trade sales increased as a share of exit volume from 36.5% in H2 2018 to 38.4% in H1 2019, reaching the second highest figure over the last five half-year periods. Secondary buyouts also saw a proportional increase to 29.1% in the first half of 2019, compared with 26% in H2 2018.

On the fundraising side, the UK market is still showing signs of resilience against unfavourable odds. The 27 funds that closed on a cumulative €19bn by the end of June compare favourably with 23 funds raising €15.21bn in H2 2018, and 25 funds securing €21.03bn in H1 last year. It is worth bearing in mind that 2019 numbers to date have been bolstered by the €10bn final close of the Seventh Cinven Fund, which hit its hard-cap in early May. Besides this, only three other funds raised a billion euros or more: Carlyle Europe Technology Partners IV (€1.35bn), Novalpina Capital Partners I (€1bn) and Investcorp European Buyout Fund 2019 (€1bn). The 10 €1bn+ funds currently in the pipeline could be seen as even more dry powder flooding into a flagging market, but it remains to be seen how much of this capital will make its way to UK-centric businesses.