With the European Union referendum just two months away, April 2016 may have seemed like a bold time for a European asset manager to launch a new fund focusing exclusively on the UK – even if it looked like we were headed for a Remain vote.
Shares in companies such as ITV, BT, and Marks & Spencer have failed to regain the heights they enjoyed before the UK voted to quit the EU on 23 June.
And these all happen to be companies that Edmond de Rothschild’s (EDR) new UK Synergy Fund, which targets companies that are either restructuring or are likely to be takeover targets, has holdings in.
Shot in the Arm
But it hasn’t been all bad. The fund also launched with shares in chip-maker Arm, purchased for around £10 each and sold just over three months later for close to £17 when Japan’s SoftBank bought the company.
The fund was seeded with £3m and now has £10m in assets under management. As of Friday 25 November, its investment was up 6.3 per cent since launch.
When the EDR fund launched, its managers predicted a “flurry of M&A activity” in the UK after the referendum – no matter which way the vote went.
Presumably, therefore, the Arm-SoftBank deal was not too much of a surprise. And perhaps the managers are even disappointed that this has not been followed by more large takeovers?
On the contrary, says Olivier Huet, who co-manages the fund with Philippe Lecoq.
“Frankly speaking, we are a bit surprised that Arm happened so fast after the Brexit,” Huet tells City A.M. “I’m not really surprised, even not very worried, that not so many deals have occurred in the last weeks.”
After a slow start to the year for M&A globally, there appears to have been a recovery since the summer, with US deals – like AT&T’s deal for Time Warner – leading the recovery. But, Arm-SoftBank and Micro Focus-Hewlett Packard aside, the UK’s quiet spell seems to have continued. Huet says this is to be expected.
“I’m not completely naive,” he says. “I’m not going to tell you that what’s happened in the UK is a booster for M&A without trepidation. In the short-term it’s certainly the contrary because everybody’s in pause mode. But in the coming months, it could resume.”
Continental Europe too protective
But why would an asset manager that thrives on M&A activity choose to launch a new fund focusing exclusively on UK-listed firms ahead of a potential deal drought?
“With problems around the Eurozone, we started to see that protectionism was higher all over continental Europe,” he says, noting that this is likely to strengthen around various elections and votes on the horizon.
“So the discrepancy between the UK and continental Europe was growing and we are still convinced that this M&A cycle could be a very long-lasting cycle.”
There is also evidence to suggest the US, under Donald Trump, could be about to become less attractive to foreign dealmakers.
In his election campaign, Trump was highly critical of China. Meanwhile, the US-China Economic and Security Review Commission this month recommended that congress block Chinese state-backed companies from taking over US counterparts.
“A lot will depend on the relationships between China and the US – so maybe it will be impossible for a Chinese company to buy any US asset,” says Huet. “And if that's the case they will focus even more on Europe.”
The attractiveness of the UK to global dealmakers – boosted by the devaluation of sterling in the weeks and months post the Brexit vote – could be harmed by politics, however.
Since taking office in July, Prime Minister Theresa May and her chancellor, Philip Hammond, have both spoken about foreign takeovers being subject to “national interest” tests. No deals are known to have been blocked.
During his Autumn Statement last week Hammond announced measures to counter the trend of the UK’s brightest companies selling rather than scaling up. He revealed a £400m government venture capital fund to “tackle the longstanding problem of our fastest growing technology firms being snapped up by bigger companies”.
Meanwhile, the Department of Business, Energy and Industrial Strategy (BEIS) is developing a “new legal framework for future foreign investment in British critical infrastructure”, announced after the government gave its belated thumbs-up to Hinkley Point.
“We have to bear that in mind,” says Huet. “I’m pretty sure they will scrutinise much more this kind of deal. But will they block them? I’m not sure.”