Repeated swoops on UK listed companies by private equity firms might have some commentators fretting over the future of UK plc, but private equity firms and investment banks involved in some of the deals have stressed their benefits to PE Hub Europe.
Searchlight Capital Partners has been involved in two take-privates this year, for alternative asset manager Gresham House and conference business Hyve.
“We’re delisting companies that people have been ignoring,” said Oliver Haarmann, Searchlight founding partner. “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. Searchlight itself has a London office, as well as offices in North America.
Management teams also see advantages, said Haarmann
“A lot of management teams would prefer to be in private equity hands because they don’t have to run around every quarter talking to public market investors who have a cursory knowledge of their business,” he said. “You have more informed shareholder discussions, potentially quicker, more efficient decision making on major decisions and better compensation. It’s not hard to see why management is receptive to private equity.”
For those worried about a shrinking stock market, more bad news could be on the way. Falling public valuations and rising interest rates mean more public to private deals are likely, said Allan Bertie, head of European investment banking at Raymond James. The bank is financial adviser to US private equity firm Resurgens Technology Partners and its portfolio company Wellspring Worldwide in its bid for tech business Sopheon – the latest UK take-private offer.
“It’s no longer like your stock price fell 50 percent yesterday, so I’ll give you a 25 percent premium and steal it off your hands,” said Bertie. “It’s been trading at this level for a year. Over 30 years, the average takeover premium is 30-40 percent. Now you’ll maybe see it about 50-60 percent and there’ll be one or two that are done at a higher premium for strategic reasons.
“There are very few institutions that realistically can look their pension fund holders in the eye and say we turned down a significant premium because they see the stock performance beating that number. You would get cash in return and stick it in the bank to earn real income. A listed company that’s not growing or paying a dividend versus bonds or deposits yielding significant cash returns? Which do you choose?”
There has been some investor pushback on some of the take privates this year, although in the case of Hyve that was resolved through a rise in the offer price to 121p per share from the original recommended cash offer of 108p, when Providence was bidding alone.
Many of the take-private bids this year have been for companies that only listed in the last few years as they struggled with life as public companies, but Hyve and Gresham were listed decades ago. They can still be at risk when public markets falter, however.
“As your stock comes down, there’s less volume in the stock, which means fewer investors want to be in the stock,” said Haarmann. “Then banks reduce or eliminate their coverage because there isn’t a lot of trading so there’s not a lot of commission to make – and so not a lot of reasons to write research.
“That’s when it becomes a self-fulfilling prophecy, because there’s less research, so there’s even less volume in the stock.”
Face to face
Searchlight had been looking at Hyve for “probably eight years”, said Haarmann.
“The exhibition and conference sector is something we’ve always thought was interesting,” he said. “We looked at it during the covid crisis. At one point when the stock really dropped a lot and there was a lot of uncertainty, we couldn’t really get to where the shareholders wanted to be. But earlier this year, with covid recovery projecting the way it is, we felt like we could get to a price that would work for management and for the shareholders.”
One reason for bidding was a conviction that, even after the move to remote working during and after covid, people will still want physical meetings – although they may be more selective.
“You want to be in the winning conferences,” said Haarmann. “You want to be in industry verticals that have fundamental growth and change, and Hyve has the industry leading conferences. They run the leading fintech conferences, they have one of the leading online retail conferences, they have a big renewable energy conference.”
Organic growth will be in those existing verticals, while new verticals would come by add-ons, he said.
Gresham attracted Searchlight with its position in sustainable and renewable assets, including UK forestry. The growth plans are similar.
“Gresham has good organic growth, especially in its renewable energy investment sectors,” said Haarmann. “But we would also be open to making add-on acquisitions, especially geographically, as we’ll have some acquisition opportunities in the United States and in Europe.”