Challenging times for publicly listed companies

Multiple factors are taking PE firms down the P2P route. For a start, we have seen a prolonged period of outflows from asset management firms who invest in UK publicly listed companies. They face a shortage of funding given the reduced appetite to invest in the UK. With a key source of capital to finance growth drying up, going private becomes more compelling for frustrated corporate executives.

As well as a lack of available capital, publicly listed companies are further hampered by tough trading conditions. Pressure on revenues and profitability pushes down valuations, making a move to private ownership a more convincing strategy to take to demanding shareholders. A publicly listed company with a depressed valuation invariably catches the eye of PE firms.

Pressure on revenues and profitability pushes down valuations, making a move to private ownership a more convincing strategy to take to demanding shareholders.

In addition, a slowdown in private company exits as owners wait for economic conditions to improve means there is a scarcity of good-quality assets for PE firms to buy. The decrease in merger and acquisition (M&A) activity as well as initial public offerings, further explains why P2Ps are piquing PE firms’ interest.

Opportunities for PE in P2P

PE firms with funds large enough to handle the needs of publicly listed companies seeking to leave the market are keen to take advantage. Those with the experience and ability to handle these complex deals have been busy.

Our recent major deals have seen Investec advising the directors of energy infrastructure company Smart Metering Systems (SMS) on its potential £1.4bn sale to global investment firm KKR. SMS is listed on the Alternative Investment Market and once under private ownership, could see KKR help to accelerate the company’s growth.

We also advised FTSE 250-listed veterinary pharmaceuticals company Dechra on its £4.5bn sale to PE firm EQT. The deal was the largest P2P transaction in 2023 in the UK.

PE firms see investing in a public company as an opportunity to implement value creation plans that help these businesses regain traction and return to their true value. We can see this in the commitments made by EQT to support the next growth phase in their newly acquired asset.

Taking public companies private is a complex process, but one aspect brings a degree of clarity and greater certainty for PE firms. Intensely fought auctions of privately-owned companies where multiple PE firms bid for attention is replaced by the ‘rule of six’ under the UK’s Takeover Code.

Here, the seller can only approach a maximum of half a dozen potential buyers. This reduces the risk of information leakage as discussions take place while the company’s shares are still publicly listed.

Dealmakers in the public eye

While conditions currently favour the P2P trend, PE firms also face considerable challenges. One of the most obvious is much more public scrutiny while a deal progresses. PE firms must operate in a time-pressured environment where the action is constantly in the public eye. This puts pressure on them to get everything right.

Another hurdle is the amount of due diligence – or relative lack of it – that buyers can undertake. Financial and corporate data available on publicly listed assets is relatively limited compared with the fine toothcomb approach that PE firms can apply to privately owned businesses. Not only is there limited access to information there is often less time available to analyse it before an exit is concluded.

Is there a P2P slowdown ahead?

We have seen a marked uptick in P2P activity in the last 18 months that corresponds with the drying up of inflows from asset managers to public companies. However, we believe there is likely to be an inflexion point during 2024. It will probably come later rather than sooner in the year when public-to-private activity stabilises or slows.

A decrease in P2P transactions will be driven largely by greater certainty on interest rates as well as the outcome of political events, notably the forthcoming UK general election and US presidential race. That said, until public markets open up and capital flows return to fuel corporate growth, PE firms are likely to continue looking to P2Ps as an enticing destination for their funds.