Improved UK economic outlook boosts market confidence

Alice Murray
02 January 2014

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Encouraging UK GDP growth forecasts have been noticed by institutional investors, which have been busily pouring cash into new vehicles and supporting enhanced returns through over-subscribed private equity-backed IPOs.

As 2013 came to a close, the Organisation for Economic Co-operation and Development (OECD) revised its economic forecast for the UK, predicting that the economy will grow its GDP by 2.4%, up on its previous forecast of 1.5% set in May.

The improved outlook already seems to be evident in recent UK private equity activity. Looking at fundraising activity in recent weeks, it would appear that investors are keen to back UK-focused funds. August Equity was the most recent beneficiary, as it put the finishing touches to its latest vehicle - August Equity Fund III - in late November. The lower mid-market investor surpassed its £180m target and reached its hardcap of £200m, following a first close of £100m in June.

What is important about the firm's road trip was its ability to diversify its investor base. The new vehicle collected commitments from investors including Partners Group, JP Morgan, Akina and PPM Managers.

Largest UK-only fund in past five years
August's effort follows Graphite Capital's speedy fundraise, closing on £475m in September after just six months on the road. The fund, GCP VIII, is the largest UK-only vehicle to be raised during the past five years, according to unquote" data.

And a particularly exciting feature of this fundraise was that, despite no placement agent, it managed to increase commitments from US- and Japan-based investors, collecting 35% of the fund total from these geographies compared with 25% in its 2007 predecessor vehicle.

UK private equity activity has been further vindicated by a spate of impressive IPOs. At the larger end of the market, Permira listed Just Retirement, with shares initially priced at £2.25 each, representing a market cap of £1.125bn - around 13x its forecast 2014 operating earnings.

The long-awaited listing of Terra Firma portfolio company Infinis Energy saw the company valued at £780m, with shares priced at £2.60 each. The IPO awarded Guy Hands's firm with gross proceeds of £234m.

Good things come in small packages
Despite initial enthusiasm by institutional investors about the Just Retirement and Infinis listings, neither has witnessed a surge in share price; instead both have followed a fairly flat trajectory. However, moving down the market and looking to recent listings of UK-based venture-backed companies, the picture is surprisingly brighter.

Abingdon-based Oxford Immunotec Global, backed by several venture firms including DFJ Esprit, Spark and Top Technology Ventures, recently listed on Nasdaq with a market cap of $196.3m and shares priced at $12 each. After just five days as a public entity the medical diagnostic company's shares had rocketed to more than $15 each.

But most impressive of all, as well as being a wholly-UK affair, has been the listing of Applied Graphene Materials to London's AIM. The company was supported by IP Group, the North East Technology Fund (NETF) and the Finance for Business North East Proof of Concept Fund (POC), managed by Northstar Ventures. Shares were initially priced at £1.55, but after just four days on the exchange they rocketed to £4, more than double the starting price.

Recent successes for new funds and exits via IPO evidence improved investor confidence in UK businesses. But most interesting is that the lower- to mid-market fundraises and the venture-backed listings have fared far better than their large-cap counterparts.

However this is unsurprising when understanding why the OECD has improved its outlook for the UK economy: the nation's good economic health is chiefly thanks to a resilient labour market, improved levels of consumer spending and appropriate monetary policy - all factors that support the vibrant UK SME landscape.