As the UK comes out of the summer months, the vaccination campaign appears to have helped the UK economy restart – and private equity markets with it. According to Philip Dakin, a restructuring consultant at Kroll, the private equity market remains well positioned to deliver strong performance over the next few months as it seeks to acquire properties at low prices for existing portfolios.

The global private equity market is now worth more than $ 4 trillion, according to a Preqin study. The UK has long been Europe’s most developed private equity sector and remains at the center of this trend even after Brexit and the pandemic.

As the UK government pulls back its support measures that have helped many companies get through Covid-19, there is suddenly an increased demand for new capital. This is something that positions the private equity market in Britain extremely favorably – because according to Kroll Managing Director Philip Dakin, even after two years of turmoil, the fundamental fundamentals that fuel the market remain. Not only is pent-up demand huge, but debt markets remain positive in terms of debt and the cost of funding.

He explained, “For businesses large and small, government support has been available in the form of loan programs, job retention programs – aka leave – and moratoriums on rents and HMRC obligations. . While cash flow may look strong today, the decline in government support will begin in a few months, and for some, balance sheet pressures will follow soon after. This is not to say that the financial pressures facing businesses will lead many businesses to insolvency, but dealing with increased working capital requirements is a challenge that many business owners face in the short term. . “

As this demand escalates further, the potential capital gains tax changes are also starting to interest many business owners looking to sell parts of their businesses to stabilize their accounts. Dakin noted that due to these changes, public ownership has fallen into disuse as an exit strategy for many organizations – while selling to a competitor still comes with its own business risks. In this case, the private equity market should benefit, because it can invest without being perceived as “competition”, while avoiding the tax measures on capital gains that public sales would pose.

Emphasizing the effects of these changes, Dakin said, “There are many investment and acquisition opportunities. This has already been demonstrated, with global M&A activity in the first quarter of 2021 at its highest level in more than a decade. “

Portfolio resilience

That’s not to say private equity firms haven’t faced their own unique issues in the wake of the pandemic. The funds briefly halted active trading in March 2020, as economies shut down and people were ordered to stay at home. Instead, all of the attention has been focused on an assessment of their portfolio companies at the onset of the pandemic, with the origination and portfolio teams working together to support their portfolio management teams.

“This resulted in a squeeze in working capital,” Dakin continued, “and any additional funding must have come from existing lenders and / or equity injections from the PE houses themselves. The question now is how much. how much of this dry powder was used to support their portfolios to maintain a status quo for 12 months, and what impact does this have on their ability to make new investments.

Ultimately, Dakin believes that despite the uncertainty they face, private equity firms are adapting quickly. With opportunities to acquire some low-priced assets on the horizon, as some companies fail in the post-pandemic market, the situation likely offers a series of additional opportunities for existing portfolio investments or for creating a new platform. investment.

Dakin concluded, “We are definitely entering uncharted territory, and unlike previous recessions, the pandemic can have long-term effects on consumer behavior and business models. Like all other markets, private equity must negotiate the current economic crisis induced by Covid-19. But the sector is extremely well positioned to weather the storm as one of the key characteristics of the PE is its ability to be agile and react quickly to changing trends.