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Private Equity Breakfast

Private Equity Breakfast

Following a recent Odgers Connect breakfast event with members of our independent consulting network, Adam Gates, Head of Odgers Connect, discusses how Brexit has already and will likely affect private equity firms in the UK

The UK has been shrouded in political and economic uncertainty since the EU referendum in 2016. The future landscape of the UK is dependent on a government (whichever one that may be) struggling to confirm a deal for the impending third extension Brexit deadline. Indeed, depending on the outcome of the general election, as unlikely as it may seem, we may be in for a complete Brexit u-turn! However, despite the uneasiness of the market, the past five years has been a period of unprecedented success for the private equity industry, with June of this year being the busiest month for PE buyouts in the UK since late 2007. 

This isn’t to say that Brexit hasn’t made a profound impact on the PE sector. PE firms have made substantial changes to the ways in which they are operating and choosing to invest. They are finding ways to handle the ever-increasing uncertainty and are devising how they can profit from the downturn.

In a recent private equity breakfast Odgers Connect hosted with a cohort of independent consultants working in the PE space, we asked about this impact on the industry: How has Brexit affected private equity in the UK? And, what opportunities are there for independent consultants? Here are the top five insights that came out of the discussion.

1. Competition is fierce

Markets have been greatly affected by the Brexit fall-out and the political challenges the UK has faced over the past three years since 2016. Despite the underlying concern around the volatility of GBP, Britain is still seen by many as a high potential investment area – after all with every downturn, comes opportunity.

PE firms are more dissuaded from high risk investment during this time of uncertainty, and so there is heightened focus on the stability of markets and buying whilst prices are low. For the most part, investors are looking at non-cyclical sectors that buck economic trends. As a result, automotive and other areas of manufacturing are being disregarded. However, anomalies do exist; the aerospace industry is an area in demand with a reported backlog of over 9 years of orders to be completed during the current slump in business and spending. With non-cyclical sectors drawing attention, funds are looking for independent consultants who can help them identify hard-to-find opportunities in the cyclical space.

2. International relocation

A growing number of large cap firms are unsettled by the current political and economic environment and are considering moving their headquarters outside of London to another European city where they currently have more activity and more prospects - the three biggest deals in Europe last year took place outside the UK. Already 332 financial services firms have moved jobs out of London to other European cities due to Brexit. International firms are having to forecast whether London’s role as the bridge between Europe and the US will remain in the future without its membership of the EU, or perhaps Dublin, Frankfurt or Paris will adopt that role.

The other main driving force of this move is the uncertainty of talent. If the UK leaves the EU with no deal, there is a concern for how to manage an international workforce of many portfolio companies and the challenges that may lie for the acquisition of talent from outside of the UK. HR consultants are able to take this task on to oversee the transition of people, navigating legislation and corporate requirements, to ease the movement of talent between countries and offices.

3. Transformation needs

We are seeing a trend of increasing digital capabilities in private equity portfolios. There is a lot of activity and opportunity in PE with a high number of deals on the table and significant dry powder to spend. Incorporating effective digital tools can assist and advance market data analysis pre deal. Using data science and analytics enables faster, fact-based decision making when selecting and valuating potential targets. Experienced consultants are being asked to determine the systems required, and talent needed to ensure that digital processes are optimising the work being carried out pre and post-deal.

PE firms also need to understand the transformation needs of the companies in their portfolios. Digital transformations can dramatically improve the returns of an acquired business by enhancing market share and operational effectiveness – maximising profitable growth as well as enhancing capital asset values. This is an opportunity for those consultants who can draw upon their expertise of transformation programmes by identifying how to transform the portfolio company, constructing a plan and seeing it through to support the company to realise their operational goals.

4. Value over short-term financial gain

PE firms have moved on from a simple financial leverage strategy; now they look at the whole value chain and think about how they could make operational improvements to ultimately increase the company’s value. The strategy has pivoted to offer longer hold periods, seen by two first-time funds, Core Equity and Cove Hill, having raised more than $1 billion each with anticipated holding periods of up to 15 years – unusually long as the average hold period has been wavering around 5 years. Firms are increasingly considering partnerships to make significant growth with longer-term investment. There are no quick-fixes involved in this method of private equity investment, but rather an extensive value-creation plan that must anticipate challenges well into the future. High level research into the market, the supply chain and future political and economic forecast is required that an independent consultant can incorporate into a detailed transformation roadmap.

Private equity is now about managing and operating a “conglomerate” of companies over a significant period of time rather than having a quick turnaround. One trend that we are seeing is that firms are increasingly looking at buy-and-build strategies that focus on longer-term value building through buying a stable platform company and growing it with the acquisition of smaller companies to support and expand the business. There must be an integration plan involved for this strategy of value-creation, a key task for an expert independent PMI consultant that will be able to seamlessly incorporate the work of one company into the larger business being built up.

5. Due-diligence

PE firms are becoming more corporate and less entrepreneurial. Instead of taking more risks with gut-instincts, they have introduced more processes around decision-making before they ‘press the button’ on a transaction. PE firms are being more proactive in committing to due-diligence around finance, legal, people and leadership. Oil and gas companies, for example, are focusing on ESG (environmental, social and corporate governance) in assessing a potential investment opportunity. We see this as an area of increasing importance for investors. There is a need to be more secure in an investment in this particularly volatile climate in the UK and so having a clear understanding of the state of the company before investing is critical.

Firms are also being motivated by the prevailing trend in disparaging media stories stemming from the ethical questions around several PE invested start-ups. When assessing the potential targets, PE firms are now looking at people – this has become particularly important due to the partnership nature of a PE and portfolio company. But the assessment of people is not only on a leadership level but from top to bottom with a particular view of the talent pool and processes within succession planning.

Due-diligence needs to be consistent across a firm to give a clear assessment of a potential investment and weigh in on the risk involved in taking on a company. An independent consultant can work closely with a PE firm to construct an assessment tool that covers the necessary questions to get the insight required to make a stronger investment decision.

As we continue to navigate through unchartered waters, despite the continued uncertainty, we see positivity from those more adaptable PE firms. With the pound still low against the US dollar and euro, and dry powder to be deployed, there are opportunities out there for those funds investing in comprehensive due diligence and that have a value creation proposal focussed on transformation. These are the areas we feel are ripe for the independent consulting model: experienced and agile experts who can work with management teams to deliver growth, and ultimately high multiple exits for PE.

For more information please contact Adam Gates.

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