Several recent headlines are talking about how Britain is the centre of a global Private Equity buying spree. This activity is either a worry for some or an opportunity for others. The year’s record-setting buying spree is causing politicians, trade unions, and uneducated investors to worry about potential job losses and increased debt levels. However, the savvy investor can realise the opportunity for what it is and knows the great potential.
What is going on?
Since the start of the year, a flurry of bids for companies post Brexit and the Covid-19 pandemic left London-listed companies trading with cheap valuations and, thus, vulnerable to takeovers. These takeovers are being orchestrated by Private Equity buyout firms such as HULT Private Capital, which use debt to quickly acquire businesses that they will typically own for between three and five years, maximising the value contained within the organisation before selling them for a profit.
The most recent large takeover bid is one for $9.5 billion by Fortress Investment Group to purchase the British grocery chain Morrisons. The Fortress offer is just the most recent private equity acquisition attempt, which, Lazard Asset Management states, accounts for 85% of taking-private British deals this year. A stock market with undervalued companies has resulted in Private Equity’s willingness to spend $45 billion to purchase British companies in the first half of 2021. Refinitiv data illustrates this increase, more than double the next best first half-year on record and accounting for almost 10% of the total $547 billion which PE has spent globally.
In most cases, the Private Equity buyout model is a positive for the target companies usually in need of a managerial and strategic shakeup or injection of financing. Critics tend to point to some prominent downfalls like the Debenhams department store group, which was laboured under a significant debt burden when their private equity owners had moved on. Looking at Debenhams on an economic level, Debenhams group had extensive financial issues before their PE takeover, and benefiting from the cash injections it saw likely kept it afloat longer than it would have without the takeover. The Debenhams PE shareholders and investors also made millions of pounds from the risk they took.
July data from Peel Hunt showed 38 London-listed companies were either already acquired by Private Equity or were in the process of being acquired this year. Besides the Morrisons deal, included in the list are Dubilier & Rice and KKR’s acquisition of John Laing Group, an infrastructure firm, as well as Advent-owned defence firm Cobham, agreeing to a $3.6 billion takeover of Ultra Electronics just this past week, on top of CVC and the London-listed Stock Spirits announcement of an approximately $1 billion deal the week prior.
JPMorgan Private Bank’s head of investment strategy for EMEA, Grace Peters, called private equity interest in UK companies an excellent thing, saying that with equity investment, “you want to know there is an incremental buyer.”
The British attraction for cash-rich private Equity is obvious. Since 2018 the US and European stock indexes have gained 65% and 25%, respectively, while the FTSE 100 is down 8% over the same period, trading at only 12.6 times future earnings. The US and Euro benchmarks currently sit at 21 times and 16.3 times future earnings, respectively; British stocks are discounted to their global peers at the deepest levels in over three decades.
The reasons for this discount are many; Brexit is first on the list, with COVID right behind it. A quote from HULT Private Capital’s Senior Management Team member Mr Amrit Singh “typical FTSE-100 banking, energy, and mining shares, have cheaper valuations than the tech sector, as their performance relies on a positive growth outlook; however, smaller British stocks are only trading at 13.2 times future earnings, behind US midcaps with an average 17.6 times. This difference provides HULT with a plethora of acquisition opportunities, of good British companies for our Private Equity group.”
Janus Henderson, a portfolio manager at Tom O’Hara, goes even further, saying that UK valuations are often unjustifiably cheap, even when these companies are hugely cash-generative, adding that “UK for sale” is an ongoing theme and will remain so until the market is better value. While the market refuses appropriate market valuations, Private Equity is happy to come and take these great companies “on the cheap.”
Benefiting the market as a whole
This generous price premium also benefits the average investor by raising asset managers’ higher share prices expectations for the London stock market after its years of underperformance. According to Peel Hunt analysis, Morrison’s shareholders will reap a 40%-plus premium assuming the buyout proceeds at 270 pence/share, in line with this year’s average premium offered by private equity firms.
Media’s PE bark is bigger than the bite
Supply and demand laws dictate that Private Equity deals will continue to support share prices by removing equity from the market; however, though the headlines might be sound extravagant, it should be noted that the 2.4 trillion-pound FTSE 350 index dwarfs PE’s 11 billion pounds in market cap withdrawals through July. Even if all the announced deals go through, Peel Hunt estimates that only 26 billion pounds, totaling 13 billion shares, with leave the public space but to the advantage of their shareholders, who will likely reinvest in other undervalued British companies, and according to Charles Hall, Peel Hunt’s head of research, supply “firepower for fundraising for IPOs.”
PE at HULT Private Capital
This market of opportunity is excellent for HULT Private Capital to find good deals among undervalued firms on the London Exchange. There are now several arbitrage opportunities between public and private markets that our investors can gain from while taking advantage of low lending rates to purchase identified potential takeover targets. With low price-to-earnings ratios staying attractive, we see nearly unlimited upside for buyouts of British companies. We will continue to offer opportunities for investment in our HULT Private Equity takeovers to accredited investors and High Net Worth Individuals who wish to see superior returns not possible with traditional capital markets.
Summary
Private Equity will continue to be a hot topic while the opportunity to profit remains. Though there has been lots of movement in this area, and the takeovers make big headlines, PE makes up only a small portion of the market. For savvy investors, well-executed PE takeovers will continue to be an opportunity to benefit from their superior returns.
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