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PE Panorama: Buyout bonanza in the UK

Buyout
By Paul Mackintosh   
August 16, 2021

Global buyout funds are on a buying spree in post-Brexit UK, to an extent that has pundits and the public alike worried.

According to a report in The Conversation, around £156 billion (US$215.6 billion) of buyout deals was recorded in the UK in the first seven months of 2021, the highest level in 20 years. Given the approximately $1 trillion of dry powder cited by Bain & Co. as sitting in buyout funds as of June 30, you don’t need to be a rocket scientist to work out where a lot of that powder is being burned.

The Times newspaper says “bargain valuations” is one of the major reasons for this UK splurge. With the FTSE 100 dragged down by post-Brexit concerns and Covid-19, UK-listed companies are looking decidedly cheap compared to their global peers, especially in the light of an anticipated post-pandemic rebound.

However, an article in the Financial Times written by Michael Tory, co-founder of London financial advisory firm Ondra Partners, points to a deeper and more structural dimension to this valuation discount.

According to Tory, the UK has “a pensions and insurance company savings system biased in favour of dividends rather than capital appreciation”. He cites the example of buyout target Morrisons, which he says paid out some 90% of its net income in dividends over the past five years while its share price depreciated. The reasons he lists are the small average size of UK pensions funds – roughly £300 million – and their closed and finite structure, and their aversion to risk, which UK insurers also share.

And in responding to this investor base, he says that UK-listed companies remain risk averse and exhibit poor capital appreciation and undervaluation. According to Tory, this has resulted in the FTSE 100 being “one of the poorest performing markets in the industrialised world in capital appreciation terms”, with only a 14% increase in the past two decades.

In his view, the solution is to be like the big Canadian pension funds, i.e. for pension giants to be major investors and owners of business in their own right and also invest heavily in private equity as limited partners. That’s an impetus that the UK corporate landscape badly needs, one way or another.