The UK private equity (PE) market has thrived in recent years by attracting international capital to help drive the expansion of UK and European-headquartered businesses. The decision to exit the EU and the uncertainty of how this will be achieved will present both a challenge and an opportunity.
The foundations of PE’s model are based on making long-term investments in companies to guide them through periods of change without the pressure of regular public reporting. This investment capital is needed now, in the run up to Brexit, as much as it was before the referendum. In addition, the basic premise that long-term, transformational investment is an effective way of delivering above-market returns to institutional investors is as relevant as ever, and managers, markets and regulators will adapt to see it continue.
Of late, PE has been a victim of its own success. It has raised large sums of money to invest but, as a result, the level of competition to acquire robust and dynamic businesses has increased, causing valuations to soar to seemingly unsustainable levels. The effect of Brexit and the uncertainty that comes with it has made completing a deal with all but the most robust businesses a more complicated process and the more cyclical sectors, such as retail, have seen a correction in valuations that is arguably much needed. PE funds that have recently raised capital will no doubt look to take advantage of this opportunity and those with experience of investing through the cycle, may look to invest at a potential low point.
Like other forms of investment, PE can be highly effective in times of uncertainty. Large, cross-border transactions have been most affected as they are most exposed to changes in exchange rates. Some owner-managers will decide not to raise money at the lower valuations on offer. But those that go to market through necessity will find the established firms very much open for business. While the market is yet to find any sort of new normal, the opportunistic and the most experienced funds will be as active as ever.
For any advice on how Brexit may affect your business, please contact Charlie Jolly.