We’re going to take a deeper look into the deal pipeline this morning. First up, we speak to Searchlight Capital Partners’ Oliver Haarmann about why the UK stock market has been so appealing for private equity firms – and why he believes criticism of the number of take-private deals this year is unfair.
Next, Allan Bertie of Raymond James talks us through the deal outlook and whether he expects many of the potential deals to come to fruition. He also explains why a change in UK tax could lead to a rise in minority investments.
Ignored in public
Take-privates – especially in the UK – have been busy so far this year, generating more than a few headlines about private equity raids on UK plc.
While some might bemoan a shrinking UK public market, one GP involved in two such deals this year defended the practice, outlining some of the benefits and arguing that these companies had effectively been ignored by public investors anyway.
Searchlight Capital Partners has been involved in two take-privates this year, for alternative asset manager Gresham House and, alongside Providence Equity Partners, conference business Hyve.
“We’re delisting companies that people have been ignoring,” Oliver Haarmann, Searchlight founding partner, told me. “What difference does it make if they’re going to ignore Hyve or Gresham for another three to four years? That’s a good headline story, but the companies that are generally taken private are unloved, under-invested public companies that are going private for the very reason that public market investors weren’t actually flocking to them.”
Searchlight expects to take Gresham private in late 2023 or early 2024, having agreed an offer at an enterprise value of £441 million ($535 million; €507 million) in July. Searchlight, alongside fellow private equity firm Providence Equity Partners, had already completed a take-private of Hyve at an enterprise value of £524 million in May.
Haarmann said that a plus for the deals from the UK’s perspective was that both companies will remain headquartered in the UK, ultimately creating more jobs and tax revenues for the country if the companies grow.
Check out the full article to learn more about the expected pipeline for take-private deals as well as Searchlight’s growth plans for Gresham House and Hyve.
Just before we leave the public markets, I’ll just mention briefly that CVC Capital Partners is postponing its planned IPO until next year, according to a report in the Financial Times.
Looking at private deals, sources had told PE Hub Europe over the summer that they’d expected deal activity to pick up from September. But while many deals are in the works, potential buyers are pushing back against processes that might involve them competing against a surfeit of rivals over several rounds, Allan Bertie, head of European investment banking at Raymond James, told me.
“At the start of September, a whole load of deals hit the market. It’s still a bit early to tell if they’re going to get done, but we will see over the next four to eight weeks. My sense is that quite a lot won’t get done. We’ve seen some buyers saying that if the sellers are calling lots of people – say 25 plus – they’re not going to spend any time on it. They want it to be a targeted process.”
Another obstacle is a worsening macro and geopolitical picture since the end of the summer.
“The conflict in the Middle East isn’t helping sentiment,” said Bertie. “A couple of managing partners I spoke to recently said they’re looking at each other across the table and asking, ‘Do we need to do this deal? Is there a risk we look stupid if the market falls 10 percent because of macro and geopolitics that we’ve got no control over? Or do we sit and wait?’”
Higher taxes aren’t usually a fun topic for fund managers, but in the UK at least, they could help push through some deals.
The Labour party is well ahead in the polls ahead of the next general election, which must come no later than January 2025.
Labour had promised to end private equity’s favourable tax treatment and yesterday, the Financial Times wrote about how “private equity executives are preparing a campaign to water down” the pledge.
But it’s other areas of the tax code that could lead to more deals, specifically capital gains tax and inheritance tax. Labour is yet to publish its manifesto, but there has been plenty of press speculation that it could introduce changes to one or both.
That could lead to a rise in minority investments by private equity firms, said Bertie.
“If I’m a founder, and a government coming in next time is increasing or changing the tax burden on capital gains or inheritance tax, why not sell 40 percent of the company now and de-risk?” he said. “I’ve got cash, the family’s well-provided for, and I’ve got a partner to help invest through the cycle. That will maybe accelerate ahead of the election.”
I’d love to get our readers’ thoughts on what the pipeline is likely to look like for the rest of the year and into the first quarter. Send them over to me at email@example.com