UK private equity: what's on the cards for 2015

Alice Murray
23 January 2015

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A look back at activity in the UK private equity market in 2014 hints at an interesting year ahead for the asset class. Alice Murray reports

The UK general election will of course dominate the headlines this year – we are just over three months away and it is already the hot topic. While the uncertainty caused by the unknown economic and business environment is likely to dampen activity in the short term, outside of politics, unquote" has made several predictions for the year ahead.

Stepping down
With pricing continuing to swell, 2014 saw many players moving down the valuation scale – typically large-cap players reaching into the mid-market. In November, private equity behemoth Carlyle acquired Dublin-based General Secure Logistics Services in a deal thought to be worth less than €25m. Prior to that, KKR made a surprising move into expansion capital through its investment in OEG Offshore Group in July. In order to do the deal, KKR invested from its balance sheet rather than through its fund. Just two weeks later KKR made the same move with its £100m investment in UK online retailer The Hut Group.

While the UK mid-market is well known for being overcrowded, it looks set to reach over-capacity in 2015. This will force GPs to think more carefully about origination strategies, as deals sourced through processes are likely to carry some eye-watering price tags.

Platform games
While pricing and competition appear likely to heat up even further this year, buy-and-build strategies offer a neat solution for mid-market and lower-mid-market players to ensure a steady flow of cash out the door.

According to unquote" data, this strategy has lost popularity in recent years, with acquisition finance deals peaking at 38 in 2010 and steadily dropping to just 20 in 2014. It appears that buy-and-build is back in vogue, however. In early 2014, Warburg Pincus picked up London-based asset manager Source in a deal worth just more than €100m. Through the private equity firm's partnership with the former boss of iShares, Warburg is looking to grow the company predominantly through strategic acquisitions.

The Americans are coming
Technically, a lot of Americans have already come – recent years have seen a steady flow of British companies moving from European-based private equity portfolios to those of their US counterparts. Graphite has been one of the GPs banking on this: it sold Alexander Mann Solutions to New-York-based New Mountain Capital in October 2013, and one year prior to that offloaded NES Global to US buyout house AEA Investments.

However, it would seem the pace at which North American GPs are picking up UK-based assets is on the up. In the second half of last year there were nine instances of US buyout houses buying or investing in UK private equity-backed companies.

In December, Lone Star Funds picked up UK brick maker Hanson Building Products, shortly after another US firm, Searchlight Capital Partners, acquired billboard business Ocean Outdoor. October saw US venture firms Wicklow Capital and Lightspeed Ventures support York-based Blockchain's $30m series-A financing round. In the same month, Canada's Teacher's Private Capital invested in Doncaster-based Bridon, Stamford-based Brookside Equity Partners purchased Tellermate, and Boston firm Great Hill partners supported the £80m buyout of London-based travel search engine Momondo Group.

Other sales to US-based firms in the second half of 2014 included Sageview Capital's investment in Alfresco Software, JF Lehman & Co's purchase of Aeronautical & GI Holdings, and Lake Capital's secondary buyout of PR agency Engine Group from previous backers HIG Capital.

As pricing in the US nears 2006-07 highs, we are likely to see more US players looking at companies in the UK and across Europe in the hunt for value. While this could be seen as another layer of competition on top of an already heated market, many of last year's deal show, that hungry US buyers could provide a nice exit option for those looking to tidy up portfolios.