Private equity firms eye UK stock market for cheaper deals

Private equity groups are stepping up their pursuit of British companies, capitalising on a UK stock market that has fallen even though resurgent US equities have set record highs.

Pub chain Marston’s, private jet services group Signature Aviation and power supplier Aggreko are among the London-listed companies targeted by buyout firms this year. 

The rate of approaches has picked up, with six being announced in 2021 compared to 14 in the whole of last year, according to data provider Dealogic.

The FTSE 100, London’s index of blue-chip companies, and the FTSE 250, home to companies that are smaller and typically more exposed to the UK economy, have both fallen over the past 12 months. By contrast, the S&P 500 index has recovered from a slump when the pandemic first struck and is up 16 per cent over the same period.

As well as the economic damage inflicted by the UK’s repeated lockdowns, investors say the Brexit uncertainty that hung over the market for much of last year hurt sentiment.

“This is the moment for private equity to play the role they should play, which is, inject capital at attractive returns when the time is right,” said Lionel Assant, European head of private equity at Blackstone. “I think it’s a fantastic moment to do that.” 

Although the Europe-wide Stoxx 600, a benchmark for European companies, is also down over the same period, the allure of the UK goes beyond potentially cheaper valuations. It is seen as an easier place to take listed companies private than many European countries because its thresholds for shareholder approval are lower.

The UK stock market “has undoubtedly underperformed”, and Britain’s economy “has been disproportionately affected during Covid times” compared to its peers in Europe, Assant said.

That leaves investors well placed to benefit from a recovery, he said, adding that “there is an expectation that, like in most past crises, the UK underperforms in bad times and overperforms in good times”. 

Two London-listed household names, the AA car breakdown service and the security group G4S, are already at the centre of take-private bids. Rival private equity-backed groups have been vying for G4S for months, and the AA agreed a sale to Warburg Pincus and TowerBrook last year. 

If a lacklustre UK stock market makes for an attractive hunting ground, buyout groups are also under pressure to deploy record-sized funds, especially after some slowed pace of acquisitions early in the Covid-19 crisis. The industry has about $2.5tn in so-called dry powder waiting to be spent. 

As money has flowed into private equity funds, the valuations that companies command has jumped, with the average purchase price for US leveraged buyouts hitting a record high of 13 times earnings in the first nine months of 2020, according to figures from Refinitiv LPC. 

“US markets are inflated from a valuation point of view, so investors are looking for opportunities that offer value,” said Saba Nazar, global co-head of financial sponsors at Bank of America. “I think a lot of these UK companies will be attractive targets, be it for private equity, Spacs [special purpose acquisition companies] or US and other international buyers.” 

Some UK companies hit hard by the pandemic are now receptive to private equity approaches, she said. “Finding your competitive edge after the turmoil and upheaval we’ve all seen in the past 12 months takes time, and it’s better done in a private environment as opposed to being subject to public market scrutiny.” 

Marston’s this month rejected a £693m offer from the Beverly Hills-based private equity group Platinum Equity, saying it “significantly undervalues” the business. Blackstone and Global Infrastructure Partners have made a £3.5bn bid for Signature, alongside Bill Gates’s wealth manager Cascade Investment. 

Aggreko said this month that it was in talks with TDR Capital and Miami-based I Squared Capital over a potential £2bn takeover. Other London-listed groups that have either been approached by, or agreed to be sold to, private equity firms this year include the investment platform Nucleus, the debt collector Arrow Global and the financial planner AFH.