2020 Outlook: Political change heralds UK buyout revival

Katharine Hidalgo
04 February 2020

Tweet
Facebook
LinkedIn
Google plus
Send to

Deal volume may have struggled last year, but record-high aggregate value and a more settled political backdrop mean that 2020 could a busy one for the UK. Katharine Hidalgo reports

In a year marked by intense political turmoil and wider macro uncertainty, the UK and Ireland was home to 229 deals in 2019, marginally down from 236 in 2018, according to Unquote Data. The share of European deal volume also dropped to a five-year low of 20.4%. Market participants have by and large attributed the dip in activity to the political headwinds faced by the UK amid several Brexit deadlines and a snap election in the winter. Palatine Private Equity managing partner Gary Tipper says: "Any degree of uncertainty always has a negative impact on most financial markets and an impact on confidence."

Despite sluggish deal volume, aggregate deal value for the region hit a post-crisis record high of €55.1bn, up from €50.5bn in 2018. The prolonged increase in deal value can largely be attributed to high entry multiples currently demanded by vendors. Managing partner Richard Caston of RJD Partners says: "I expect multiples to remain high, and possibly increase further for quality businesses."

Another contributor to 2019's deal value were mega-deals (deals with enterprise values of €1bn or more), which grew to a record-high of 13. Ireland also saw its first mega-deal since 2014 with Blackstone's €1.64bn acquisition of the European distribution division of CRH, an Ireland-based provider of building materials.

The uptick in take-privates in 2019 could partly explain the trend, driven by rising competition and entry multiples in the mid-market. Richard Hope, a managing director in the fund investment team at Hamilton Lane, says of the increase in mega-deals: "Deal activity for companies with enterprise values of £500m and up has been more stable because they demonstrate the ability to continue to earn."

GPs are also looking to smaller companies to deploy capital. Deals with a value of £25-50m grew both in absolute terms and in the percentage of total deals, to 52 transactions and 23% of all volume respectively. Hope says: "We see the most opportunity in companies with EVs of less than £100m because there are a lot of buyers at that range, but that is the most volatile segment also."

Consumer lack of confidence
A continued decline in the share of deals in the consumer sector reflects a weak consumer market. The percentage of total deals made up by consumer buyouts has steadily dropped from 35% of all deals in 2015 to 21% in 2019. Deal volume reached 49, down from 66 in 2016.

Tipper says: "If you look at our portfolio there has been a stark difference in growth in profitability and turnover in B2B and B2C companies. B2C businesses have had a tougher time given Brexit and the failures on the high street." In January 2020, the Office for National Statistics reported that sales in monthly terms have not risen since July 2019, a record-long decline.

The advanced sector that suffered the greatest decrease in activity was travel and leisure, dropping to three deals in 2019 from 10 in 2018. RJD's Caston says: "The travel sector has had a lot of instability. Thomas Cook made the sector even more unstable, and it would benefit from some certainty around Brexit and currency volatility."

However, fundraising statistics suggest that following 2019's dip in deal volume, dry powder will have to be deployed generously. Buyout and generalist funds that held final closes in 2019 raised a record-high €52.7bn; although, many of those 30 funds, such as the €11bn Permira VII vehicle and the $17.5bn Advent International GPE IX vehicle, will have a pan-European or global focus.

In addition to the glut of fresh capital available, the result of the general election in December 2019 engendered a greater sense of certainty among many investors, despite the prospect of a hard Brexit later this year. Tipper says: "There is a wall of money building up that will need to find a home in 2020. We already see a lot of interest from private equity buyers."