Comment: Prolific year bodes well for 2016

2015 was billed as an "interesting" year for private equity – it has turned to be a fascinating year for analysts. In politics, a Conservative majority was unexpected and brought with it renewed optimism and confidence, and an increasingly positive outlook for the UK economy. Our Agents of Growth research published earlier this year shows that mid-sized businesses have consistently outperformed the market on job growth, productivity growth and investment in innovation. Globalisation is accelerating. While businesses are looking to unlock new revenue streams the increased connectivity of the digital age is lowering barriers to entry, opening more international growth opportunities for dynamic businesses. These are some of the many factors that should bode well for mid-market private equity, together with improving credit conditions and availability of debt, including from alternative lenders.

2015 has been another prolific year of exits for UK private equity, with nearly 100 exits to date with a combined value of £10bn, already surpassing 2014 volumes. Fundraising has continued apace, but the same cannot be said of investing new capital. Deployment of capital hasn't been as easy in 2015 (year to date – 119 new deals in < £500m space compared to 178 and 151 in 2014 and 2013 respectively). Within this, secondary volumes have held up, though primary deals are significantly down, with commentators attributing this to a combination of stiffer competition from cash-rich corporates "buying" growth in a low-growth environment, and an increase in deal multiples and valuation expectations requiring some investors to exercise discipline and caution.

There is an unquestionable appetite to deploy capital, and at Grant Thornton we can certainly attest to this, having been involved in 30 deals to-date in 2015; we have seen a significant number of new market entrants from small spinouts and family offices focusing funds on direct investment, to UK offices of US funds. This has added to an already highly competitive UK mid-market investment community resulting in only a handful of firms completing more than one transaction. Earlier in the year we referred to the importance of dealflow origination and focusing on firm differentiators. With market competitiveness expected to continue, this will remain paramount to a fund's ability to successfully and consistently deploy capital.

Looking ahead
The outlook for 2016 should be positive. With at least £130bn of dry powder waiting to be deployed, of which c£40bn has been raised since the start of 2014, coupled with the diverse range of debt financing options, few can remember the industry better equipped at the starting line. At a macro level, factors including the risk of Brexit, slowdown in Chinese economic growth, and the wider impact of events in the Middle East, are weighing somewhat on economic confidence. A number of regulatory changes continue to be worked through such as changes to VCT investment rules and the way carried interest is taxed.

Notwithstanding this, most people are looking forward to 2016 with optimism, with investors reporting strong pipelines, a long list of successful fundraises and high-return exits fresh in the memory. At a deal level, the increase in multiples fuelling valuations coupled with scarcity of investment opportunities will continue to challenge investors – discipline and focus will be the order of the day in 2016!

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