The failure of Silicon Valley Bank and market turmoil that followed shook recovering private equity investment appetite in Europe. In the first quarter, secondary buyouts by private equity firms hit their lowest level since the disruption of COVID-19 in 2020, with €16.8bn of investments equating to less than half the value of investments made at the start of 2022, according to PitchBook data reported in the Financial Times1.
Context illustrates that investment is decelerating from record high levels. Data from Invest Europe shows that 2022 was the second-best year on record for private equity investment across the continent as firms deployed €130bn, down on 2021, but nonetheless 30% above the average of the last five years. Investor appetite also remains strong with a record €170bn of private equity and venture capital raised with a focus on Europe, well ahead of the prior record of €131bn in 20212.
Private Equity Increases Focus on Public-to-Privates
Relatively low valuations in public markets combined with persistent weakness in sterling has led to a surge of interest in take-private deals. In addition, private equity firms have focused on companies that, because of market disruption, might be trading at significant discounts to prior peaks.
Providence’s offer for FTSE-listed events organiser Hyve in March was pitched at 105 pence per share, valuing the business at roughly £306mn. While at a premium to recent share price performance, Hyve’s shares were trading in excess of 600 pence prior to the pandemic. Resistance from shareholders who argued that the offer undervalued the business resulted in an increased offer of 121 pence per share in April, giving the business an improved valuation of £363mn.
Company boards have also pushed back initial private equity approaches before opening discussions when prices reach an acceptable threshold. UK-listed engineering group John Wood Group entered talks with Apollo when the firm made its fifth and final approach valuing the business at almost £1.7bn3.
Such resistance from boards and shareholders is part of the normal cut-and-thrust of negotiations, with many bids and approaches for UK-listed companies proceeding. At the end of April, 29 UK-listed were under offer, including 14 recommended firm offers, according to research from broker Peel Hunt4.
With an average offer value of £530mn, firms are predominantly hunting the FTSE 250 index of mid-cap companies. However, bids for larger companies are benefitting from the support of sovereign wealth funds, enabling firms to meet the higher level of equity financing required in the current environment. EQT teamed up with ADIA in April for a possible all-cash offer for veterinary pharmaceuticals business Dechra, a deal that would value the business at over £4.6bn5.
We expect the recovery in appetite for publicly listed business to give a lift to private equity activity more broadly. Confidence is returning to levels seen before banking disruption in March, with increased appetite for strategic sectors benefiting from secular tailwinds, such as the energy transition and life sciences.
UK’s Labour Warns of End to Carried Interest Tax Advantage
Against the recovering backdrop for private equity activity in the UK, the shifting political landscape may mean changes in the future for funds and general partners. Heavy losses for the Conservative Party in local elections in May and strong gains for Labour have pollsters predicting the potential outcome for the next UK general election, expected next year.
While the recent polls and results are not a guarantee of election success, the British Labour Party, led by Sir Keir Starmer with Rachel Reeves as Shadow Chancellor, has already been holding talks with influential business groups. The pair were reported to have had meetings with executives at firms including Advent International, Blackstone and Brookfield to discuss the role of private capital investment in driving economic growth and financing the energy transition.
At the same time, however, the party has also stated its intention to end the carried interest tax break, which sees payments taxed as capital gains at 28% compared with the higher level of income tax, currently 45%. While noting that some aspects of the discussion could be uncomfortable for private equity, the BVCA’s chief executive Michael Moore has welcomed the change in tone from Labour which has moved from talk of asset stripping to how the industry contributes to economic growth6. The Financial Times quoted one person involved in the talks as saying that the industry had accepted changes to carried interest tax under Labour, but hoped that reform rather than abolition of the capital gains treatment could be possible.