2023 has been a terrible year for the UK takeover market. Photo: Alberto Pezzali/AP
When private equity giant KKR burst into the market You could almost hear the cries of delight in Canary Wharf's £1.4 billion takeover of British energy company Smart Metering Systems in early December.
The deal joins a late wave of takeovers of London Stock Exchange-listed companies, including Hotel Chocolat. and The Restaurant Group, and provided a boost to deal-starved bankers late in the year.
But despite the late rebound, 2023 was a terrible year for the UK acquisitions market, with overall activity hitting a decade low.
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Cause? Private equity titans like KKR, which typically keep M&A deals buoyant when the rest of the market dries up, were largely left on the sidelines.
Watch and wait
For the first time in six years, total volume According to the Center for Research private equity and MBO (CMBOR), the value of private equity deals in Europe fell below the $100bn (£78bn) mark in 2023, leaving private equity deal volume at its lowest level since 2013.
< p>A combination of high inflation, rising interest rates and wars in Ukraine and the Middle East has cooled the veins of private equity buyers.
Think back to the warning signs of last Christmas, such as the Asda and Morrison takeovers, and questions arise about what will motivate private equity companies to return to the negotiating table in 2024.
“Private equity has become widespread in the last few years. Obviously they were less active last year, but they have a big opportunity,” says Peter Luck, head of investment banking at Bank of America. “If your cost of capital is unpredictable, it can be very difficult to value an investment, but lower volatility and rate changes will be key to giving investors a better understanding of the value of their capital.”
With the Bank of England raising rates 14 times in the past two years, from 0.1% to 5.25%, and the Federal Reserve keeping US rates high, private equity has continually overestimated how much they are willing to pay for companies.
This moving target has forced companies to cut their spending despite having plenty of cash.
British firm CVC Capital closed its latest fund earlier this year, raising €26bn (£23bn) sterling). , the largest buyout fund in history.
The result topped a new fund launched in 2022 by Advent International, which raised $25 billion in investor funds that private equity firms typically use to take controlling stakes in companies.
The total challenges, more than $500 billion was raised in new funds in 2023, down only slightly from the previous year.
Keeping your powder dry
The research firm estimates that global private equity investment is also about $1.5 trillion worth of dry powder will be spent on deals this year. Add to that the leverage of additional debt, and that amount could approach $8 trillion.
“Looking at historical data over the long term, 2023 may well represent a low point as industry next year “There will likely be a gradual increase in activity,” predicts CMBOR professor Kevin Ames.
Coupled with historically low levels, the time has come for an influx of private equity investment to push companies out of the UK stock market, according to another UK banker.
“Private equity firms are looking at a lot of deals and I I think there are a lot of files open in the market overall, but maybe they're waiting for the price movement to be in the right place before they press the button,” he said.
“We have some really great businesses in the UK that are very well run and operate internationally. I believe that US buyers may have reasonable interest in some very good quality assets. Just need a little more confidence.”
However, this confidence was undermined by the consequences of deals made at a time when money was cheap.
The biggest leveraged buyout of UK CD&R company Morrisons in recent years demonstrates the risk of buying at the wrong time.
Since the deal, Morrisons' debt has increased to almost £7 billion, causing its interest payments are highly susceptible to even the slightest change in interest rates.
The takeover of Asda by TDR Capital and the Issa brothers, which included the largest ever sterling corporate bond sale, also raised eyebrows.
Interest costs on Asda's debt have risen every year due to the cost of servicing the debt.
The biggest bear trap for the private equity titans to avoid now is entering into a deal that will look expensive in 12 months.< /p>From Dip Dabs to Real Estate
Before becoming a $1 trillion fund manager, Blackstone backed cottage industries and the move away from traditional British private equity is also making deals difficult.
In the UK, the company owned retro sweets maker Tangerine Confectionery, which owned Dip Dabs, Flumps and Wham bars.
But now Blackstone and fellow giants KKR and Carlyle are less likely to invest in Dip Dabs and more tend to invest their billions in esoteric loans and real estate investments.
This has resulted in a lack of major deals. private equity firms, leaving smaller players such as CD&R and TDR Capital to prop up the market.
Megadeals worth more than $1 billion accounted for less than half of all European buyouts for the first time since 2017. , with smaller deals picking up the slack, according to CMBOR.
However, the only hope for a return to dealmaking is the pressure private equity firms are under to exit the business and return money to investors.
Private equity exits are expected to hit a 10-year low in 2023, according to Baird research.
This could mean private equity firms could become more aggressive in seeking to divest these companies in 2024, Baird said.
Game changer
IPOs are the biggest laggards, so we may see the biggest revival. Just 82 private equity-backed IPOs have hit the market this year, down from 392 in 2021, according to Preqin.
“We are seeing an increase in activity and interest in investment,” said a second senior British banker, who asked not to be named. “They have to change their portfolios and prove they can make the money back. Good quality assets tend to come out first.”
However, interest rates are likely to remain the driving force behind deal volume in 2024.
Traders are betting that the Bank of England will cut rates by nearly two percentage points to 3.5% next year. That's seven rate cuts.
The Fed is also expected to cut rates, which may help provide more clarity to private equity firms hoping to get deals done.
“2023 was a tougher year year. to uncertainty. No macro scenario prevents deals, but it's very difficult to do deals if you don't know how they're going to play out,” Luck said. “If we enter a period where there is more transparency and confidence, it will give people more confidence to be proactive.”
Amen!
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