Private equity – raiding or aiding in the UK…
Private equity-backed bids for UK listed business have become a near daily occurrence, as have the associated remarks of dissent from both government and the asset management industry alike. This blitzkrieg is at a pace and represents a monetary scale not seen in the decade post financial crisis. The latest spree has seen 13 approaches for listed business, spanning the full market capitalisation spectrum from debt repurchase specialist Arrow Global to the vertically integrated household name and purveyor of staple goods Morrisons – the latter generating words of defiance from the shadow business secretary, implying the government could and should intervene. There have been more Private Equity deals thus far in 2021 than at any point since records began, more than 360 separate business entities when including private transactions. Boards are also circling the wagons as they are accused of lacking vigour in their defence of corporate GB.
“It might be enforceable in a court of law, this contract, but it is not enforceable in the court of public opinion and that is where the government steps in."
Harriet Harman, politician
The political class takes a visibly confrontational stance born of a belief a protectionist orientation portrays strength on behalf of everyone, when it is arguably groundless and on behalf of no one, rather reminiscent of the Harriet Harman quote above. It related to pension provisions for the RBS CEO some decade or so ago, but the thematic holds. In a country built on the foundations of property rights and the associated rule of law, we cannot pick and choose when and to whom the rules apply retrospectively. That would entail the deployment of a rather different and problematic political and market structure. The tax treatment applied to carried interest in the private equity industry represents one of many red flags of inconsistency on how this industry is seen and treated.
The UK has chosen a capitalist system, and it cannot simply be suspended as and when there is a perceived undesirable outcome. It is a robust, heavily scrutinised and regulated system, not a transient seasonal fashion collection. Some politicians and market participants appear to forget this at times and align their actions more closely with a news cycle than with proper long-term planning. As well as accordance to the rules, I suggest a more pragmatic assessment of what got us to this position of elevated interest in UK listed assets from overseas financial buyers. Some subjectivity applies to the following, but it is hard to entirely refute the essence of issues being born of government action or inaction:
- Brexit installed a protracted period of discounting of UK listed assets versus overseas equivalents, some 10x multiple points on EPS versus the US as a rudimentary benchmark – a c40% differential.
- Brexit depressed sterling, adding to the UK asset attraction for overseas buyers.
- Unprecedented pandemic-related monetary policy created a liquidity and return environment conducive to elevated PE activity.
- It is not unusual for public pension funds to have 10% or more of assets allocated to Private Equity vehicles, making it arguably hypocritical for ministers to interject on specific PE transactions that they find unpalatable.
The above points realistically guide us to why this bid frenzy is being experienced, the direction that it is coming from and how it has gained such force versus history. It is due to an unprecedented set of global factors where the UK represents a leveraged version due to additional regional specifics. We are losing quality quoted business to foreign buyers at valuation levels arguably not reflective of the ultimate commercial potential of the business concerned. This is, however, not new; it is just a period of extreme activity and sensitivity, in part a product of the nature of the UK listed arena and the enabling factors in terms of prevailing rules on share class and voting rights versus other markets and jurisdictions.
Two points to note regarding asset managers’ suggestion of the impropriety of private equity actions, crying foul after the event: they had the option to gain exposure at the depressed valuations prior to the approach being made, in a generally well governed and liquid market. Private equity also plays with both feet, removing liquidity through acquisitions with one and using the IPO route to add liquidity options with the other – Dr. Martens being a good recent example of a brand with unique credentials and one that had a period of strong stewardship in private equity hands. Private equity is arguably a hard business, but it is not definitively a negative force. Barbarians at the gate is a good read and the easy interpretation – “raiding the UK” – but they have also executed corporate transactions at huge premiums, boosting both performance and cash balances at some of the very mainstream equity asset managers complaining of their involvement – “aiding the UK”. The following quotes might be seen as indicating how the sector thinks and operates and might be advisory to UK asset managers too.
“When nobody wants something, that creates an opportunity.”
“In life and business, there are two cardinal sins. The first is to act precipitously without thought and the second is to not act at all.”
Carl Icahn, Activist Investor
Broad conditions and return parameters could not lend themselves better to the current prevalence of the private equity model and the UK market and its influencers could do almost nothing more to enhance its credentials as an attractive target area. I don’t think my view is Maverick but I think the following Top Gun quote demonstrates the way private equity players see the UK and the second is illustrative of the caution politicians should take when assessing the validity of interjecting on the topic of market operation; they also allow me to segue into how DP Advisory can help corporate management best deliver a realistic and compelling narrative in this landscape.
“This is what I call a target rich environment.”
“Your ego is writing checks your body can’t cash.”
Top Gun, 1986, Maverick and Stinger respectively
I touch on factors above that have played a part in the formation of the current supportive picture for private equity to operate at these frenzied levels that corporate management can ultimately do little or nothing to control. What management can do, however, is to promote capital market participants to attribute a firm valuation rating and provide the greatest level of funding support to the strategic imperatives of the organisation.
Rigorous ongoing analysis is required of all elements of strategic messaging in combination with the execution of a strong and consistent capital markets programme. The best defence is to have an appropriate valuation rating and high-quality management executing on a strong and well-communicated strategy, supported by shareholders and an experienced and well-regarded board. Internal and external participants need a clear understanding of and belief in the long-term value accretion path the company is on. DP Advisory was founded by the author to identify business limiting capital markets dynamics and provide solutions. If you would like to have an exploratory discussion regarding the specifics of your business, please get in touch at your earliest convenience.