- The private equity industry has built up record levels of cash during the pandemic to splurge on new deals
- For buyout firms, many of the cheapest targets are in the UK
Private equity firms are going bargain hunting. Takeovers of London-listed companies have soared in recent months, as cash-rich buyout firms search for underpriced businesses to take private. Although the acquisitions boom is facing pushback from both campaigners and shareholders, it shows little sign of slowing down.
In the past four weeks alone, there have been at least nine proposed private equity takeovers of UK-listed companies, with many of the offers now in the process of seeking shareholder approval. Since the start of the year, some of the most high-profile deals completed by buyout firms include the £219m acquisition of roadside recovery specialist AA, and the £3.4bn takeover of jet servicing group Signature Aviation.
According to data compiled by Dealogic, these acquisitions have contributed to the busiest start to the year for private equity-backed bids since 2012.
Unleashing the dry powder
But why are private equity firms swooping on the UK stock market?
The reason is twofold: the private equity industry has recently built up record levels of cash to splurge on new deals, and many of the cheapest targets can be found in the UK.
The low valuations of UK-listed companies will be a familiar story to retail investors, as the London market has been weighed down by the twin blows of Brexit and Covid-19. Even as a successful vaccine rollout fuels a rebound in the economy, the FTSE 100 is trading 6 per cent lower than at the start of 2020.
Buyout firms are therefore more likely to find a good deal in the UK than in the US, where the S&P 500 has soared from one height to the next over the past year. Dominick Mondesir, private equity analyst at Pitchbook, points out that companies in the latter typically trade at 23 times earnings, compared with just 14 times in London.
The FTSE 100 vs Apple:
But as UK stocks get cheaper, private equity funds have only been getting bigger. Institutional investors have diverted money into these vehicles in recent years, Mondesir added, as they outperformed more traditional assets.
Even as the pandemic caused dealmaking to grind to a halt last year, fresh cash continued to flow in, leaving buyout firms with billions in spare funds. They are now deploying this so-called ‘dry powder’ at pace.
The largest takeover currently being recommended to shareholders is the £2.8bn acquisition of UDG Healthcare (UDG) by Clayton, Dubilier & Rice, which offers a 22 per cent premium to UDG’s closing price on 11 May, the day before the bid was made public. Meanwhile, US private equity giant KKR (US:KKR) is launching a £2bn takeover bid for infrastructure investor John Laing (JLG), and fellow buyout group Carlyle (US:CCG) is looking to acquire inhaler developer Vectura (VEC) at a valuation of £958m.
The ‘City plunderers’
That’s unless the Daily Mail can stop them. The volume of takeovers is now so large that it is making headlines in the mainstream press, and the newspaper owned by the Daily Mail & General Trust (DMGT) has launched a campaign to protect British companies and their workers from the “City plunderers”.
Private equity investors, who have a reputation for loading their acquisitions up with debt in search of short-term growth, have never been beloved by the general public. But the Mail pushback follows a particularly bad period of publicity for the sector in the UK.
Among the “Ten deals to make your blood boil” listed by the newspaper is the 2003 public-to-private buyout of Debenhams, whose bankruptcy last year resulted in 12,000 jobs losses. It also pointed to the collapse in 2011 of care home group Southern Cross, about four years after private equity giant Blackstone (US:BX) cashed in £169m by offloading its final stake in the company.
Private equity groups have disputed their role in high-profile bankruptcies like these, but they now have to contend with the ire of institutional investors as well as campaigners. The investment arms of Allianz (DE:ALV) and M&G (MNG), two of UDG’s largest shareholders, have both criticised the attempted takeover of the healthcare group, with the latter claiming the bid “fails to offer fair value to ordinary shareholders”.
Last month, train operator FirstGroup (FGP) was similarly hit with a rebellion by two of its biggest shareholders, Schroders (SDR) and Coast Capital, although roughly 60 per cent of investors eventually approved the sale of its US bus business to EQT Infrastructure. Such public statements from fund managers are rare, and they reflect the concern that UK companies are being snapped up too cheaply amid the buyout boom.
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. So, whether you want to or not, you could soon be cashing in your holdings when private equity comes knocking.