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UK public to private deals bring new opportunities for growth

16 July 2021

Edwin Chan

Director, UK Funds

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Edwin Chan

Director, UK Funds

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As private equity firms ramp up public to private deals, they must set out their stewardship credentials and due diligence processes to retail investors

Public to private deal announcements in the UK have reached a pitch not seen for decades. In the past year bidding wars over supermarket chain Morrisons, private jet business Signature Aviation and infrastructure investment firm John Laing are just some of those to have shone a public spotlight on private equity, an asset class typically private in nature as well as name.

While assets remain undervalued, they will continue to be targeted by private equity houses and special purpose acquisition company (SPAC) sponsors, as Cliff Pearce, Head of Capital Markets at Intertrust Group, explains in his report, What’s really driving US SPAC teams to Europe?

In recent years the UK’s stock market has been in an ongoing state of recovery. Plunged into the pandemic fresh from efforts to prove itself after the Brexit vote, it has been on an uphill path through depressed valuations.

For a long-term investor in search of growth potential in new areas and valuable upside, this is the dream scenario.

How to improve listed private equity’s public image

But publicly traded asset managers – also acutely aware that these assets are undervalued – have voiced concern over private equity-led takeovers. They feel shareholders deserve a premium to reflect the companies’ Brexit and pandemic battle scars.

This is not to say that public to private deals in the UK cannot result in an attractive premium on share price when multiple bidders are involved.

Morrisons’ management recently accepted a £6.3bn ($8.7bn) takeover bid in a deal led by Majestic Wine owner Fortress Investment Group.

Under the deal’s terms shareholders will get 254p per share – a 42% premium on the price before the offer period, brought about with the disclosure of the rejected offer from Clayton Dubilier & Rice.

The new potential owners have worked to quash press and shareholder criticism by promising “long-term ownership”, a commitment to the supermarket’s customers, support for its pension scheme and a £10-an-hour minimum wage.

Also key to clinching the deal were a commitment to UK food security for farmers and a promise not to sell the supermarket’s substantial freehold property portfolio, according to the retail-sector trade press.

Take-private deals demystify private equity for shareholders

As retail investors have more exposure to private equity through takeover of public stocks, with share prices negotiated as part of the deal, they are less likely to see this as a David and Goliath scenario.

When regulators grant retail investors the freedom to invest more into private equity funds and not just into firms themselves, more information will also become available to those investors – such as the due diligence process that a target management team has to complete to receive capital.

This will provide reassurance that a private equity-backed business would be unlikely to end in an Enron-style scandal. Giving retail investors more access to information and knowledge about the asset class should also reduce the fear that seems to surround it.

Certainly, the public (or media) perception of the private equity asset class – steeped in mistrust – often seems to result from the limited opportunity for knowledge or understanding.

Private equity, for all its financial might, will remain an easy target for attack in the press until it is more open in setting out its case for public scrutiny.

Restructuring the private equity model for the retail market

As more private equity firms do go public, either to realise their carried interest (before anticipated capital gains tax hikes take place) or to ensure a flow of evergreen capital, retail investors will increasingly become part of this asset class. This will lead organically to greater retail investor access to funds, but also retain retail investor protections.

Going public will mean general partner salaries, compensation packages, carried interest and bonuses will be open to public scrutiny. More than ever before there will be a need to prove their worth.

This will require a significant restructuring of the current operating model for private equity fund interaction and communication with investors.

At Intertrust Group we are ready to help prepare our fund clients, limited partners and their future retail investors to take on this challenge.

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