What our clients are telling us
Amidst a dynamic and volatile market, we are finding our clients wanting to understand market intelligence more quickly and efficiently than ever before. This will enable them to inform their own views and to navigate and plot the best outcome for their companies.
With this in mind, we have produced a focused overview of topics which are front of mind for clients across our business.
- 2021 has started positively for clients. The strong deal activity seen at the back end of 2020 has continued into January and we can see this level increasing in Q1.
- There have been a lot of motivating factors for deal activities, including Brexit trade deal clarity and Covid-19 vaccines generating positive sentiment.
- Notably, the possible upcoming capital gains tax changes are motivating both private clients to assess their current finances and business owners to fast track exits.
- Private companies have had a slightly flatter start to the new year. Clients are planning and forecasting with more confidence, despite acknowledging there is a still a way to go before Covid is completely behind us.
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Advisory & Corporate Broking
We observed a strong uptick in deal activity through the final quarter of 2020 and this trend has continued into the new year. There remains a large amount of private equity (PE) dry powder available for investment, with many sponsors looking to make up for lost ground from a fund deployment perspective. Business confidence to pursue M&A has been supported by vaccine developments and the finalisation of the UK/EU trade deal. Another factor which is likely resulting in some pull-forward of deal activity is the expectation of increases to capital gains tax (CGT) rates. As such we expect activity levels to hold up strongly through the remainder of Q1.
Understandably, recent deal activity has centred around sectors which are inherently resilient in the face of Covid, in particular Healthcare, TMT and Financial Services. We expect these sectors to remain in vogue through the remainder of the year. Strong investor appetite for assets which have traded robustly through Covid has been evidenced through attractive valuation multiples and a noticeable pick up in the number of off-market deals, with PE sponsors in many cases looking to pre-empt competitive auction processes. We are pleased to have supported a number of such transactions from a financing perspective during what was a record Q4 for our lending business.
While our clients expect improving investor confidence, adjustment to the “new normal”, the need for continued PE fund deployment and the mooted CGT changes to keep transaction activity up in the short term, it remains to be seen how the remainder of the year will play out. Speed and success of vaccine rollouts as well as longer-term economic prospects, once large segments of the economy are ultimately weaned off government support measures, remain the key unknowns.
Whilst we are into a new year, the key trends in the private equity market seem like a continuation of what we saw at the back end of 2020. Despite the pandemic prompting a challenging economic environment, 2020 Q4 saw a peak in deal volume for the year and we have early signs that this strong performance will continue into the first half of 2021 and likely even longer.
For Investec’s private equity clients, 2020 ended on a positive note with most portfolios performing well and deployment of capital in line with expectations if not above. Overall, the market accounted for 48 transactions in the UK with values above GBP 100m, which is only slightly behind last year’s volume.
At the start of 2021 and despite the 3rd lockdown, the private equity market remains robust, with clients mostly reporting full pipelines, especially for Q1 and Q2. Some of those transactions are motivated by the upcoming changes in capital gains tax, but clients are continuing to actively explore capital market options too.
Looking ahead at some potential trends, discussions around IPO exit options are continuing to increase, we also see lots of activity across all key sectors, either for new platform investments or add-ons to existing portfolio companies.
Our clients are happy that 2020 is behind us and that there are reasons to be optimistic as we move forward into the year ahead. Exceptional advances in human science and technology have allowed for multiple Covid vaccines to emerge. Despite the onset of new virus variants which upset Christmas plans across the country, there appears to be light at the end of the tunnel and an opportunity for smaller, privately owned business to get back to some form of normalcy.
2020 for privately-held businesses was all about ensuring survival. Entrepreneurs whose whole lives are typically invested in their businesses rushed to conserve cash and cut cost. Many of them raised additional capital mainly through the UK government’s guaranteed loan schemes.
With the hope of a vaccine-led resolution to the Covid crisis now in sight, business owners can begin to plan and forecast with a bit more confidence. In addition, businesses have dodged dealing with an unthinkable “no-deal Brexit” scenario. On the face of things – supply and trading relationships with Europe can continue without major change or disruption. With all this, we are sensing increased risk appetite. We have seen a significant uptick in deal flow and activity into the start of the new year.
Many clients are wanting to talk to us about raising new growth capital (debt or equity) for their businesses to accelerate investment and capitalise on opportunities. Others are saying the timing is right for them to acquire a smaller rival. Some are even considering an outright sale of their business, notwithstanding the weak macro market environment at the moment.
The anticipated changes to UK capital gains tax have also helped accelerate this decision for a number of entrepreneurs. It is expected that in his April budget the Chancellor will shift capital gains tax, currently 20% for higher rate taxpayers, to move more in line with higher rate income tax which is at 40%. This is a meaningful push on any owners who might have been considering a sale of their business in the next few years to bring forward such a decision.
We find that these deal conversations are especially prevalent amongst those businesses in our client base that have proven themselves resilient to Covid or are even a direct benefactor from it. A surprising number of our clients – often through a combination of both luck and design – fall in this camp. Founders of these businesses are at a huge advantage right now and many of them are very active – seeking capital and advice – to make the most of the opportunity.
So overall the founder and entrepreneur market certainly feels to have a new energy and optimism about it. That said, our clients in this segment are quick to acknowledge that there is still a way to go before Covid is completely behind us, and the threat of a new strain arising that is resistant to all our vaccines is, of course, the big fear that must remain on all our minds a while longer.
Advisory & Corporate Broking
A new year but unfortunately all horribly familiar. The worsening of the pandemic in Q4 and imposition of ‘Lockdown III’ in the UK has seen some of the cautious optimism building into Q4 abate, but not for all.
The UK vaccine rollout, should it go to plan, provides some level of risk underpin and many management teams continue to look through the immediate market disruption to seek enhancing opportunities. This was certainly the case in Q4’20 which saw total UK equity issuance of £24.0bn with over half (£12.7bn) being raised for growth through acquisitions, expansion or investment purposes.
We see this trend continuing into Q1 ’21. UK corporates, many of whom previously repaired their balance sheets early on in the pandemic, want to make sure they can capitalise on the opportunities ahead as we move towards the "Roaring 20s", should they materialise!
Over the past few weeks, it’s evident that longer-term uncertainty and risk has heightened for clients with global operations. The potential impact of more contagious variants of Covid-19 on end markets and supply chains, combined with lack of clarity regarding the global vaccine rollout, has seen management teams revisit expectations around when the global economy will indeed "open up" adding risk to forecasts.
Closer to home, as calendar year-end corporates prepare their full-year results, the interplay between furlough payments, redundancies, dividends and management remuneration is high on the agenda. Given the updated November guidance from the Investment Association, it is clear that these topics are firmly in the crosshairs of all stakeholders. Management teams are cognizant they will no doubt fill many column inches over the coming months.
Aaron Jones and Seb Wright
Despite being back in lockdown, having avoided a no-deal Brexit and with the vaccine rollout underway, we’ve started to see some upward pressure on rates curves. That said, the rates environment remains relatively benign as we start 2021 still offering clients the opportunity to fix close to or at recent historical lows. IBOR cessation remains a key talking point as banks and clients ready themselves to use risk-free rate (RFR) on new deals whilst also planning for the sizable remediation exercise required on historic deals.
From an FX perspective, the eleventh-hour Brexit deal saw GBP rally against both EUR and USD. This is prompting some managers to re-evaluate their unhedged exposures – both at the portfolio and management company level. There remains considerable uncertainty around FX moves for this year, dependent on the speed of global economies re-opening, central bank policy and early steer from newly elected President Biden. January started quietly as GPs focus seemed to be taken up with last-minute deal closing and starting on year-end accounts. We are now seeing renewed interest in getting long term hedging lines approved and onboarded so that funds are ready to pull the trigger on trades if/when market levels look attractive.
In the energy markets, the most significant moves we’ve seen in the last month or so, have been in gas and electricity and this has really interested producers in looking at locking in some of that value. Turning to oil, we are seeing some scepticism amongst consumers about the rally given what is happening with the spread of the virus, so a little bit more caution from consumers about hedging.
Aaron Jones and Seb Wright
This year’s Santa rally in the FTSE extended into January, marking one of the strongest starts to a year in recent times. At the time of writing, the FTSE is up 4% since 1 January, building on its exceptional run into Christmas. Unusually, the FTSE’s strength has not been matched in the smaller companies – the FTSE250 is roughly flat year-to-date and the Smallcap is up 2%. This reflects largely the sector exposure of the various indices, with those smaller company indices, for example, less exposed to the oil price recovery that is driving index heavyweights Shell and BP higher in the FTSE. Notwithstanding the strong start, progress has stalled as we pass through mid-January, with clients telling us there is a definite risk-off sentiment as recent market catalysts such as the Covid-19 vaccine announcement, Brexit deal, US Presidential Election and US economic stimulus package move to the rear-view mirror.
Much of our daily debate with clients continues to surround the topic of value vs growth. Does the value-orientated FTSE rally imply a new golden era is coming for value fund managers? Or is this simply an oil price recovery and some moves in US treasury yields that are driving the oil majors and banks higher for now? There is certainly no sign yet of a sustained re-rating of the value stocks in the small & midcap markets and star sectors such as technology and healthcare continue to trade on peak multiples. A more stark illustration of the market’s appetite for structural growth can be seen in the green energy markets where star performers such as Ceres Power (world leader in fuel cells) and ITM Power (world leader in green hydrogen production) continue to rally, despite already having delivered share price returns of between 5x and 10x over the past 12 months. Of course, this sector not only offers long-term structural growth but is also the destination for huge capital inflows as asset allocators seek to position their funds to match obvious macro trends.
On the subject of capital flows, our clients are speculating that 2021 could be the year which finally sees the UK market recover from four years of Brexit-related disruption and closes its discount to European and US peers. There is no doubt that global funds remain underweight in the UK, reflected by the volatility in British politics, sterling and the wide range of potential economic outcomes that the Brexit process offered. We know that markets hate uncertainty (indeed in 2020, the FTSE troughed on 23 March, the day Boris Johnson ordered the UK into its first lockdown). So, as we better understand the impact of the UK/EU trade deal and maintain hope that the UK's aggressive vaccine programme leads Europe out of the pandemic, UK markets may start to benefit from substantial capital inflows with a commensurate, positive impact on valuations.
Capital gains tax (CGT) certainly is the flavour of the month for clients, but what do the potential changes mean? The current CGT rates are 10% on assets and 18% on property for basic rate taxpayers and 20% and 28% respectively for higher and additional rate taxpayers. The proposed changes include consideration to CGT rates coming more in line with income tax rates which currently stand at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively.
Currently, you can realise gains of up to £12,300 within your CGT allowance and therefore no tax is paid on that element. It is suggested that this figure could be reduced to between £2,000 and £4,000.
So, what could the changes mean for investors? Over the years, many of our wealth and investment clients have accumulated significant gains within their taxable investment portfolios. Whilst tax wrappers such as ISAs, SIPPs and offshore bonds have been widely used to shelter investments from tax, many clients still have taxable investments; therefore tax changes present significant challenges and are something that should be carefully considered and discussed. We saw similar theorising in the run-up to the 2019 election. At that time, some of our clients took the pre-election speculation as an opportunity to crystallise some capital gains, primarily to hedge the risk of a change in tax policy resulting from a change in Government. We are again in a position where this is a major consideration for some.
Of course, it is not suggested that wholesale changes should necessarily be made on the basis of these proposed changes, which are not guaranteed to take effect. However, for clients with significant embedded capital gains within their taxable portfolios, those intending to pass on their investment portfolios to future generations, or those considering selling their business or buy-to-let properties, these changes may have a considerable impact in future tax years.