London is set for a flurry of takeover deals as flush-with-cash private equity firms put money to use when market turbulence begins to settle, analysts have predicted.
Dealmakers have pulled back from executing in the past eight months as markets are rocked by a cocktail of soaring inflation, rising interest rates and war in Ukraine.
But experts told City A.M. that private equity firms are sat on mounds of ‘dry powder’ raised prior to the downturn, waiting to be put to use.
“There’s a record amount of dry powder in the market, as well as a need to deploy it,” Steve Courtney, asset management and private equity partner at KPMG told City A.M.
“We are having a high number of take-private conversations as Private Equity investors run their ruler over the market opportunity.”
Private equity firms globally are sitting on around $3.6tn according to a report last month from consultancy giant Bain, meaning dealmakers are well-placed to “ride out a downturn and prepare for the recovery”.
Bain said dealmakers are likely to be licking their lips at the first signs of recovery from economic downturn, with deals struck at the end of recessionary cycle often delivering bumper returns.
Courtney said that UK PLC proved a particularly juicy prospect for investors as cheap valuations have led to “peak multiples” for private equity firms. Directors of takeover targets are also increasingly edging towards the more light-touch regulatory approach of the private markets, he added..
“There’s a perception of increased regulation and high costs attached to a listing by directors, as well as the market not appropriately valuing their efforts. In addition, there’s also too much of a short term focus on earnings vs Private Equity, which can potentially take a longer term view,” Courtney said.
A flurry of prospective take-private deals in the Capital this week have set tongues wagging over the mass sell-off of British firms to foreign private equity firms, however.
Analysts at Hargreaves Lansdown said that deals involving Ted Baker and tech firm Darktrace, as well as the agreed sale of transport firm Go Ahead, would “cause fresh unease among politicians”.
“It’s fresh evidence that UK assets are considered to be cheap, still weighed down by the impact of Brexit, the weak pound and now the looming recession set to hit the economy,” said Susannah Streeter, senior investment and markets analyst.
“The risk to capital markets is that competition and innovation could suffer if corporate concentration continues to rise.”