In this blog, four managers comment on private equity’s activity in UK markets.
In H1 2021 private equity struck the highest number of UK deals in five years. With bids for Morrisons and Ultra Electronics being negotiated and Sainsbury’s said to be next in line for a takeover approach, there is little sign of private equity’s appetite for UK companies abating.
Private equity firms buying listed companies give shareholders the chance of receiving a premium price today, but this can also remove the opportunity to benefit from longer-term growth. Is private equity’s activity in UK markets an opportunity or a threat for investors and what can they do to benefit from this trend?
“Tomorrow’s value today”
Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Company mergers and corporate takeovers are part of the normal business of stock markets. In some cases, companies can be taken over for a price which materially exceeds the value which the public markets will ever ascribe to a business due to a highly motivated buyer. Sometimes companies are acquired for less than their intrinsic value; each case has its own merits. Sometimes when a business needs to go through a period of restructuring or re-organisation, it can be more easily and quickly executed away from the gaze of public market investors, and quoted shareholders can be given some of tomorrow’s value today in return for not taking on the risk of the restructuring.
“However, if any private equity backed takeover is merely to gear a business up using debt which is currently very easy and cheap to borrow, then it is a long-term threat to quoted markets. Overall, there is little to fear provided that there are enough IPOs of a sufficient quality to counterbalance any takeovers, that existing shareholders achieve a premium to fair value and that key industries and expertise remain in the UK.”
Jonathan Winton, Co-Manager of Fidelity Special Values, said: “We are not against bids by private equity groups and other corporate acquirers if they recognise the true value of individual businesses and pay a fair price. They are typically more willing to take a longer-term view than market participants who can at times be overly pre-occupied by near-term uncertainty. We’re equally happy to take a public stance and vote against a bid if we think the offer undervalues the business (as we recently did with Spire Healthcare). We don’t see this trend as a threat, as the UK market is a large market. We are never short of new investment ideas and have had no issues putting to work the cash released from recent bids.”
Ian Lance, Portfolio Manager of Temple Bar Investment Trust, said: “It is an opportunity. The trend amongst large institutional investors has been to ‘go global’ irrespective of valuations and hence they have been selling one of the cheapest markets in the world, the UK, to buy one of the most expensive, the US. As private equity are interested in absolute returns, this provides them with lots of cheap targets and hence value investors in the UK are likely to see an increasing number of their stocks bid for.”