International private equity managers continue to seek U.K. assets, despite Brexit uncertainty, due to their familiarity with the market, a desire to diversify their portfolios, and the need to deploy capital, according to market participants.
Sponsors and private debt funds stress that many businesses are insulated from Brexit and activity in some sectors, namely insurance, software and parts of leisure, remains strong.
Understandably, there have been bouts of caution over buying U.K. assets, especially as the leave deadline approaches. The U.K. has traditionally been the hottest European market for private equity deals, but a proportion of capital has been redirected to other European countries.
While firms do crave certainty over the country's future, there are a number of international buyout houses and portfolio companies Hogan Lovells' outgoing global head of private equity Tom Whelan has advised this year with regards to acquisitions. Whelan will join McDermott Will & Emery on Oct. 15.
The U.K. has a lot in its favor, despite Brexit uncertainty. It is a massive market, it is well-known, it is entrepreneurial, it is well-understood by buyers, and it is home to a lot of good assets, Whelan said in an interview.
International buyers have long been interested in U.K. deals, but Vinay Ghai, head of private equity at Baird, has seen a shift in mindset to a more international approach to assets. Buyers are seeking out U.K.-headquartered businesses with international exposure or an expansion plan, which will secure a more diversified currency set.
Lenders to private equity-owned, U.K.-domiciled businesses say they have been working with these companies to check they are ready for Brexit, especially a no-deal scenario. All feel their portfolios are as ready as they can be, and as much of the focus has been on what could go wrong, some companies have brought forward plans they already had, most often around currency hedging lines and opening international locations.
Who is taking the punt?
U.K.-focused growth capital investor FPE Capital LLP has seen increased American interest in its assets, and a lot of U.S. activity in the market overall, managing partner David Barbour said. Many of the deals taking place in FPE's sector are secondary deals, where improvements such as management team building and changes to sales and marketing teams have already been made, strategies more easily achieved by a private equity firm with individuals in the U.K., Barbour said. FPE has also seen many bolt-on deals as firms seek to build out their portfolio companies, he added.
U.K. focused midmarket private equity firm Graphite Capital Management LLP has been "very focused" on international development for its portfolio companies "for a number of years" and over the past decade has sold the majority of its businesses to non-U.K. buyers, managing partner Markus Golser said. "That really wasn't a strategy that came about because of Brexit," he added.
But Golser noted the advantages trade buyers now have if they are strategically interested in a U.K.-headquartered asset. Graphite sold tire distributor Micheldever Tyre Services Ltd. to Sumitomo Rubber Industries Ltd. in 2017. The depreciation in sterling made the purchase more attractive, and may have helped Sumitomo win the asset at a competitive price, Golser said. "If the yen has strengthened by 20% against sterling, that really means that you can put some of that back into the price and win a competitive process," he added.
Private debt lenders are adamant that U.K. midmarket buyout activity has remained strong but admit that there are certain sectors that see more private equity competition in auctions, and thus more aggressive debt pitches from lenders.
The current auction of Sykes Holiday Cottages is seeing a lot of private equity interest and consequently, financings are being mulled in the 6x leverage region, according to sources. The "staycation" has boomed in the U.K. in recent years, as the value of the pound has made holidays abroad more expensive.
Livingbridge is seeking to exit the business with a price tag of over £300 million. That is quite a profit considering it bought into the company in 2015, valuing it at just over £50 million, and has since grown the business significantly. Bookings at Sykes increased by over 20% year-on-year by October 2017, and 2018 was a record year for the company with bookings up 36% year-on-year.
Software is also in favor, as its products seamlessly cross boundaries. Take Qualitest, a U.K.-based software testing company. Bridgepoint Advisers Ltd. earlier this year bought the company from Marlin Equity Partners LLC, leading to a roughly 5x levered second out unitranche to be provided by debt funds, with banks offering the first out piece.
Insurance companies are another popular draw, with at least three situations receiving, or set to receive, financing from funds, while more could follow. Earlier this year it emerged that Ares Management Corp. provided a unitranche to support the merchant banking division of Goldman Sachs Group Inc.'s acquisition of Aston Lark Ltd. from Bowmark Capital LLP. Market sources said that the M&A process for BMS Group Ltd. is underway and unitranches are being pitched. Sources also say that Carlyle Group LP has refinanced the existing club financing for its stable company PIB Group Ltd. with a fund financing.
Simply down to competition
The stage in the cycle is also stoking appetite for U.K. deal activity. Brexit or no Brexit, private equity firms are sitting on large amounts of dry powder that must be deployed and competition remains high.
"I don't think people can sit around waiting," Andrew Harrison, head of investor relations at pan-European midmarket manager Silverfleet Capital, said.
The firm continues to see international buyers seek deals in the U.K., "that's not changed though for the last five or 10 years," he said. There will be buying opportunities, but until Brexit is sorted out, Harrison doesn't expect any more activity than there currently is.
An unnamed manager at one of the largest private debt funds said, "One or two deals haven’t happened because of Brexit, and at the moment there is a sense of 'why go now and not wait a few weeks.' So there is probably a little pent up demand building, and our U.K. team is busy. Our fourth quarter pipeline is looking pretty good too, and regardless of Brexit we expect activity to continue in the U.K."