Private equity swoops on UK companies

Private equity firms have struck 13 deals in Britain so far this year worth a total of almost $31bn – more than double the number for the whole of 2020. 

Staff at Morrisons supermarket
Wm Morrison sparked a bidding war
(Image credit: © Alamy)

“Buyout firms have struck 13 so-called public-to-private deals in Britain so far this year for a total value of almost $31bn,” says Ben Dummett in The Wall Street Journal. That’s more than double the number for the whole of last year and the best performance over the same period since 2007.

Private-equity funds invest in private companies or buy out publicly listed ones. The bidding war for Wm Morrison Supermarkets has only been the most “high-profile” example of the trend. Healthcare, property and defence businesses are also being snapped up.

Why the boom? Private-equity firms have “mounds of low-cost debt to make acquisitions” thanks to low interest rates. But takeovers usually require the buyer to pay a premium, which is difficult to justify in the pricey US market.

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Britain, by contrast, is cheap. Data from broker Peel Hunt shows that on a forward 12-month price/earnings basis Britain is “40% cheaper than the US market and 25% cheaper than the eurozone”, says “S&P 500 firms typically trade at 23 times earnings, compared with just 14 times in London.”

Britain’s quiet IPO boom

The private-equity bidding war is good for share prices. But it has also caused concern about the long-term health of the London market. If private firms delist some of Britain’s best businesses, then what will remain for ordinary investors?

Not to worry, says Simon Foy in The Daily Telegraph. As quickly as firms are going private, plenty of new ones are coming onto the market. “Since the beginning of the year, 54 companies, with a combined market value of £53bn, have floated on the London Stock Exchange”.

There is a widespread impression that the London bourse is “struggling”. That’s thanks to Deliveroo’s “high-profile flop” – shares in the food-delivery app plunged 26% after listing in March. But as Simon French of Panmure Gordon notes, “if you took an equal stake in each of the companies that have floated this year, your investment would be up by about a third in the year to date”, beating the wider FTSE All-Share’s gain of 7.8%.

Investors are often warned against having a “home bias”, says David Brenchley in The Times. Almost half of British investors told a Quilter survey that “more than 50% of their investments were in the UK…One in 12 people with more than £60,000 invested admitted to having all of their investments in UK stocks”. Investors who failed to diversify globally have paid the price over the past decade as US markets soared while the FTSE stagnated, but that trend will reverse at some point. Remember that “for a long time before the financial crisis, UK stocks beat American ones”. It’s never a good idea to put all your eggs in one basket, but a touch of home bias looks a sound strategy for now.