UK: increased caution

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Clearwater International’s Marcus Archer talks to Unquote about the ways extra caution has affected the UK private equity market since the vote to leave the European Union.

The PE market in the UK has maintained momentum and some of its pre-vote exuberance, but below the surface there is increased caution and selectiveness over deals.

Many areas appear unscathed. “Sectors not impacted by Brexit remain extremely competitive; TMT, healthcare, financial services and business services, for example,” says Marcus Archer, Clearwater Partner and Head of Private Equity, UK. However, businesses in any sector can find the potential for investment falls quite fast if there are any doubts hanging over its potential.

“If there is a business which has not got a best-in-class management team or has any issues in current trading, vendors can be surprised by how valuations and interest levels drop off quickly,” Archer says.

There is certainly no shortage of opportunities coming through, he adds, but even when PE can spot promising opportunities in Brexit affected sectors, lenders may not share their confidence.

“There are very high-quality assets in the consumer sector with good teams that are growing successfully but are struggling to raise bank debt,” Archer says. “Banking appetite is certainly impacting consumer sector valuations in some verticals.”

Interest in financial services continues to be strong, and people across the world are seeing opportunities in the UK

Trade tendencies

Demand from trade buyers has also seen some added hesitance, and this has led PE vendors to take a more considered approach to the sales process, making sure there is enough demand in the market first.

“There has been a softening of interest from European buyers, but interest from the US and Asia continues to be high in most sectors,” says Archer. “Interest in financial services continues to be strong, and people across the world are seeing opportunities in the UK.”

Demand from trade for industrials is also relatively robust, especially for firms with good management who are using more technology in the manufacturing process. There has been some softening, but this has also been global.

“Anything with a digital/tech model rather than a traditional model is going to be attractive to trade buyers, and that’s across all sectors,” says Archer.

There is even trade buyer demand for some of the more Brexit exposed areas of the UK market, such as the consumer sector. “Here they are taking a 10-20 year view rather than the typical PE three-to-five year view, which should take them well beyond Brexit. Trade buyers can be quite competitive when they take this approach”, Archer says.

While uncertainty may have slightly disrupted the UK market, it has been good business for political consultants, many of which have branched into political due diligence. Political due diligence was once exclusive to deals involving a firm dependent on government revenue streams, but now it is far more commonplace.

“Political due diligence emerged a good few years ago. It’s becoming a must-have on deals, especially on any business where government funding or Brexit has any impact on its business model or future funding streams. Five years ago it was confined to areas such as healthcare and education,” says Archer.

Brexit has not been a disaster for the market so far, but it has created some delay, extra expense and weaker price pressure for those assets not considered best-in-class.

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