Resilient private equity market eyes fresh opportunities

29 September 2021 4 min. read
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As the UK exits the summer months, the vaccine push seems to have helped the UK economy get moving once more – and private equity markets along with it. According to Philip Dakin, a restructuring advisory expert at Kroll, the private equity market remains well positioned to perform strongly in the coming months – as it looks to invest, and boost its existing portfolios.

The world’s global private equity market is now worth more than $4 trillion, according to Preqin research. The UK has long been the most developed private equity sector in Europe, and remains at the centre of this trend even after Brexit and the pandemic.

As the UK Government withdraws its support measures which helped many businesses through Covid-19, there is suddenly a heightened demand for new capital. This is something that positions the private equity market in Britain extremely favourably – as according to Kroll Managing Director Philip Dakin, even after two turbulent years, the core fundamentals that power the market remain. Not only is there a huge pent-up demand, but also debt markets remain positive in terms of both leverage and the cost of financing.

Philip Dakin, Managing Director, Kroll

He elaborated, “For businesses, both large and small, government support has been available in the form of loan schemes, the job retention scheme – aka furlough – and moratoriums on rent and HMRC liabilities. While cash flow may look strong today, the rollback of government support will start within months, and for some, pressure on balance sheets will follow soon after. This is not to say that the financial pressures facing businesses will drive many into insolvency but dealing with an increase in working capital requirements is a challenge facing many business owners in the short term.”

Heightening this demand further, potential changes to capital gains tax are also beginning to focus the minds of many business owners who are looking to sell off parts of their company to steady the books. Dakin noted that because of these shifts, public ownership has fallen out of favour as an exit strategy for many organisations – while selling to a competitor always has its own business risks. In this case, the private equity market stands to be a beneficiary, as it can invest without being seen as “competition,” while also avoiding the capital gains tax measures public sales would pose.

Highlighting the effects of these shifts, Dakin said, “There is lots of opportunity for investment and acquisition. This has already been demonstrated, with global M&A activity in the first quarter of 2021 being at its highest for over a decade.”

Portfolio Resilience

That is not to suggest private equity firms did not face their own unique issues as a result of the pandemic. Funds briefly stopped active transactions back in March 2020, as economies closed and people were ordered to stay home. All attention was instead focused towards an assessment of their portfolio companies at the start of the pandemic, with origination and portfolio teams working together to support the management teams of their portfolios.

“This has resulted in a squeeze on working capital,” Dakin went on, “and any top-up funding has had to come from existing lenders and/or equity injections from the PE houses themselves. The question now is how much of that dry powder has been utilised in supporting their portfolios to maintain a status quo for 12 months, and what impact does that have on their ability to make new investments.”

Ultimately, Dakin believes that in spite of the uncertainty they face, private equity firms are quickly adapting. With opportunities to acquire some assets cheaply on the horizon, as some corporates fail in the post-pandemic market, the situation likely provides a series of bolt-on opportunities for existing portfolio investments or create a new platform investment.

Dakin concluded, “We are without a doubt entering uncharted territory, and unlike previous recessions, the pandemic may have long-term effects on consumer behaviour and business models. Like all other markets, private equity needs to negotiate the current Covid-19-induced economic crisis. But the sector is immensely well placed to weather the storm because one of the key characteristics of PE is its ability to be nimble and respond quickly to changing trends.”