Private equity’s British shopping spree

Does a fast-growing company looking for private equity-type funding benefit more from foreign investments or local ones? More and more, we’re seeing British companies looking overseas to the US, Middle East and Asia as part of their expansion strategies, and they are increasingly drawn to private equity funds that have clout in those regions. Recent foreign investment into the UK is now trending at £1 trillion of the UK economy, and we’re already seeing that reflected that in private equity, with a large number of overseas funds investing in British companies. In an already-crowded market, how are UK private equity funds going to react?

Foreign investments in private equity have been a regular part of the practice for the past several decades. Many international firms have long-established offices in the UK, such as Blackstone and KKR, and the historical strength of the British pound and the consistent growth of the UK consumer market have made it a relatively stable environment.

Here at The MBS Group, the interesting trend we have seen recently is firms with limited prior experience and no presence in the UK making notable investments in British companies, such as Ares’ investment in wallpaper and paint company Farrow + Ball and Catterton’s (now L Catterton, following their merger with L Capital) in activewear chain Sweaty Betty and organic pet food brand Lily’s Kitchen.

However, whereas some foreign private equity firms invest in brands that are already popular in their home market, we’re starting to see more investments used as a big first step in launching a brand overseas. This trend begs the question of how vital it is for companies looking to expand abroad to have financial backing from the region. The UK-based meat substitute brand Quorn recently sold to Philipines-based Monde Nissin in a highly-contested auction period, but considering its huge growth in the US since its launch in 2012, it is worth questioning whether the brand would have even considered a British private equity firm, had they gone down that route.

The UK is home to a large number of private equity firms, which have no doubt felt the pressure of the high competition for companies up for grabs, with firms such as Bridgepoint turning to the continent, buying European brands and opening offices in a number of cities. It will be interesting to see if other UK-based mid-market private equity firms will follow suit – and if they do, will that be in order to buy assets local to that market, or to give them better access to British brands looking to expand overseas?

The corporate finance and advisory community that advise on these deals have had to adapt. This past September, global investment corporation Houlihan Lokey acquired London-based McQueen, giving both firms mutual access to the US and the UK. Other American firms, such as Financo and Harris Williams, have opened London offices or have bolstered their UK advisory teams. It will be interesting to see if this is the end of the local, niche advisory firm – especially within the consumer sector, considering the value of global growth.

With the upcoming Brexit vote and private equity’s need for guaranteed returns, it is likely that foreign firms will be skeptical when considering British companies until a decision is made in June. If the vote swings No, uncertainty around laws and regulations could mean that investing in the UK or maintaining offices in London would become more challenging in the upcoming years.

But all the same, the amount of dry powder that private equity firms are currently sitting on – particularly in the US – means that firms will continue to make moves to grab hold of the best companies for a high return. Ultimately, as head of the private equity practice at The MBS Group, I believe that regardless of changing regulations, the success of a private equity deal depends largely on the quality of the management team. Regardless of which way the vote swings on 23rd June, the UK’s wealth of innovative small and medium sized consumer-facing companies, along with its high concentration of talent, will continue to make the region a tempting one for private equity, both from home and abroad.