South East: PE investment dips as Brexit looms

Private equity investment in the South East has dipped in the first six months of this year, as heightened economic and geopolitical uncertainty continues to deter vendors from bringing assets to market, stumping overall activity – according to new analysis from KPMG.

KPMG’s study of South East transactions involving private equity investors over H1 2019 indicates that activity has fallen by more than a fifth (21%) over the past six months, from 33 deals in H2 2018 to 26 in H1 2019.

However, deal values increased by almost a third (32%), from £2.06 billion to £2.71b over the same period. This suggests that for the right opportunities, investors are still willing to deploy significant funds.

Andrew Morgan, senior partner at KPMG for the Thames Valley, said: “With so much uncertainty surrounding Brexit, it comes as no surprise that private equity deal volumes have fallen slightly in the first half of this year, with caution among investors putting activity on hold.

“While investors are taking a more measured approach in how and where they invest, it’s clear to see from the increase in deal values that their confidence hasn’t disappeared completely, and that they’re still willing to pay big multiples for high-value businesses.”

The significant amount of capital in the UK market, coupled with a dearth of quality assets for sale, has prompted private equity bidders to compete harder in auctions over the first six months of the year. It has also prompted other changes in approach, with investors engaging due diligence providers early, together with accepting greater reliance on vendor due diligence, underwriting debt and also taking commercial views on critical deal issues. Investors are taking these steps with a view to being able to present a deliverable, fully-funded bid which can be closed out in a very short timeframe; often only a matter of days after being awarded exclusivity.

Morgan explained: “Amid market volatility, the big challenge for private equity firms and their portfolios in the South East will be how quickly they can react to the changing market landscape and leverage these strategies to secure and maintain returns.

“In this highly-competitive market environment, investors are also very focused on pursuing new value creation strategies on every asset to reach the full potential of the deal. More and more, we’re seeing firms developing and strengthening their in-house capabilities to support and drive digitalisation and international roll-out strategies across their portfolios. There is also an increasing emphasis on buy-and-build strategies and add-on acquisitions to try to boost returns.”

With Brexit looming, what next for mid-market Private Equity?

While economic and geopolitical uncertainty are expected to affect PE investment in the region throughout the third quarter and into Q4, private equity investors in the region will still be keen to invest in the right opportunities.

Morgan concluded: “Despite the fact that investors in the region have been adopting a more cautious attitude toward deal-making in this period of uncertainty, with many taking a ‘wait and see’ approach, the South East market is showing resilience.

“Although there has been a slight deceleration in the volume of transactions in the region, a rise in deal value demonstrates a healthy appetite among private equity investors to continue to invest in high-quality businesses in the region, which have the focus and confidence to overcome wider market uncertainty. We expect strong valuation levels to continue as competition intensifies.”