UK General Election: reactions from the PE community

On 30 October 2019, parliament granted prime minister Boris Johnson's wish for a winter general election, and the UK electorate will now head to the polls on 12 December. The decision could be seen as injecting further uncertainty into a country that has had its fair share over the past three years, but some industry participants are also seeing the potential for some much-needed finality to the ongoing Brexit saga.

Andrew Ferguson of Baird Capital says: "If the election can pave the way to a resolution to Brexit early in 2020, that will be a very good thing." Ken Terry, managing partner at Elysian Capital, agrees: "We're praying for the end of uncertainty."

It appears many UK-focused investors are now used to making decisions in an uncertain environment. Terry says: "Most people gave up waiting in March. We have activity in the firm that will go ahead regardless of the election."

The latest statistics compiled by the Unquote research team for Q3 reveal that market participants were seemingly looking past the protracted withdrawal bill renegotiation and brief threat of a no-deal Brexit on 31 October; the summer months are rarely expected to host a bumper number of deals, but the buyout market bounced back from a weak Q2, with both deal volume and value rising sharply to match some of the most prolific quarters ever recorded by Unquote. The experience of an investment director at a mid-market firm, who wished to remain anonymous, is in accordance with this data: "We're having one of our best years in a long time. We're doing a higher volume than is normal for us."

Election periods are usually an effective brake on investment activity, if previous Unquote records are anything to go by. But with such a short campaigning window, and a number of processes that would conclude in Q4 now well under way, it is possible that the impact on deal-doing will not be felt until the first quarter.

Clearwater International partner Marcus Archer highlights the unpredictable nature of such an event, in what was otherwise shaping up to be a relatively active Q4: "It is still early days to form a view either way. We have picked up a fair number of new clients in recent weeks, a good mix of new sale mandates, private equity buy-side and refinancings, and we have a few transactions progressing to completion this side of Christmas. But we will have to see how the election campaigns unfold, and how the likelihood of the different potential outcomes on Brexit and shape of government evolve, before getting clearer indication of how the market will react. In any case, at this stage it is unlikely that many people will push for final offers or completions before the election comes to pass."

Baird's Ferguson adds: "Transactions are getting done but investors and buyers are getting increasingly cautious, and diligence is getting more intense."

Gameplanning
Shifting focus to the potential outcomes of the election, a Conservative majority seems like the most certain path for the business community. Although Brexit was never a wished-for outcome in most business circles, the equally damaging uncertainty would fade as the Tories would likely push through Johnson's withdrawal agreement and the UK would be on track to leave the European Union on 31 January 2020.

YFM Private Equity managing partner David Hall seems positive about the prospect of a Conservative majority. He says: "If the vote swings to the right, Brexit will go in one direction and the economy will follow in whatever shape that it does, but it will be generally supportive of private equity."

Based on a number of conversations with deal-doers and advisers, a Labour majority would not be warmly welcomed, as it would likely lead to a second referendum and at least several more months of uncertainty for the economy. Beyond Brexit, the Labour mandate also puts forward policies that are regarded negatively by the business community, such as the nationalisation of the water, postal and railway systems. Hall says: "Labour isn't clear on what a deal looks like. Who knows, the economic environment may be stable because of it, but the market has been quite negative about any other policies mooted by Labour and that's not good for private equity."

The third potential outcome – feared by a number of observers as a real possibility given the unpredictable nature of the contest – would be a hung parliament. Seen as a main root cause of the protracted Brexit process since the 2017 election, it is unsurprisingly not a prospect relished by investors. Says Elysian's Terry: "A majority is the thing people are hoping for." Baird's Ferguson adds: "From a business perspective, companies are desperate for a resolution to the Brexit issue in order to get on, and make the medium- to long-term decisions around investment that need to be made."

Regardless of the outcome of the election, though, the vast amounts of dry powder still available to investors are widely expected to translate to transactions down the line, one way or another. "We have heard from a number of PE funds – even before the prospect of an election became more certain – saying they would be unlikely to write a cheque until an election is called," Clearwater's Archer says. "Our sense is that there is clearly a lot of pent-up demand that could be unlocked in the first half of next year as processes resume or finally get underway. The recap market also remains buoyant, and this is less likely to be affected by the electoral context."

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