Private equity firms are sitting on an “overwhelming” mountain of capital for takeovers, which they are poised to put to work by swooping on London-listed companies, a City stockbroker predicted yesterday.
Peel Hunt expects buyout houses to be “early movers” in dealmaking this year, “provided the debt markets are supportive”, and it thinks they are likely to focus on takeovers of quoted businesses. It said the European private equity industry was estimated to have accumulated a €270 billion war chest of unspent capital that was waiting to be invested.
“The sheer weight of dry powder, following a period of record fundraising, demands the deployment of capital,” the broker said.
There was a surge in takeovers of listed companies by buyout firms in 2021, but deal volumes fell last year amid mounting investors’ fears about the health of the economy.
Central banks, including the Bank of England, are racing to lift interest rates to tame soaring inflation, bringing to an end more than a decade of cheap money that had helped to fuel deal-making. This hit private equity firms, which use debt to engineer takeovers but faced higher borrowing costs and more volatile financing markets last year, making it harder for them to pursue deals.
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Figures from Refinitiv, the financial information provider, show there was a 25 per cent year-on-year decline in the volume of private equity takeovers targeting UK companies in 2022 to $61.9 billion. This tracked a broader slump in dealmaking, with overall volumes of mergers and acquisitions involving British businesses sliding by 38 per cent to $406.1 billion.
However, Peel Hunt believes that financing conditions for deals are starting to improve. “Potential acquirers of UK plcs have accepted that the cost of debt has structurally increased and that near-zero rates are unlikely to be seen again soon, if ever,” the broker said.
“Uncertainty over rates has been the critical factor undermining deal volumes, as investors cannot reliably model returns on investment without clarity over the funding structure.
“However, in recent weeks there have been some signs of stabilisation of expectations for rates over the medium/longer term, combined with economic signals that inflation might be coming under control.”
The Bank of England’s base rate stood at a record low of 0.1 per cent in late 2021, but a succession of increases has pushed it to 3.5 per cent. Many forecasters expect the rate to peak at between 4 per cent and 5 per cent.
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Peel Hunt argued that history had shown that “private equity firms are often the first movers as the economic climate and business sentiment reach an inflexion point”.
The broker added: “The reopening of the debt markets will surely trigger take-private activity.”
Vulnerable to a takeover
While Peel Hunt did not say which London-listed companies could face a takeover, the Quest team at Canaccord Genuity, another broker, tracks businesses potentially vulnerable to being bought (Ben Martin writes).
Graham Simpson, an analyst in the Quest team, is not expecting a big private equity raid on Britain, but he is not ruling out the possibility of some buyouts because private equity firms “are sitting on a lot of cash”. He said cash-rich international corporates also could also target British groups.
Companies that could attract bids included Morgan Sindall, the construction group; Jupiter Fund Management, the investment house; Mitie, the outsourcer; Playtech, the gambling software company; Next Fifteen, the marketing business; and Clarkson, the shipping broker.
