Viewing the movements of FTSE 100 companies over the last 18 months was for the most part comparable to a drought; multinational UK-based businesses trundled along at steady growth as they mostly furloughed their staff and availed of Government-backed supports that kept them stable, if not profitable. At the same time, the S&P 500 leapt into the distance as businesses bounced off Government stimulus packages. But rather than a desert of inactivity, it appears the UK market was merely put on ice. It has now popped; £41.5 billion has now been spread across 124 deals this year. Most recently, this spending spree has seen Morrison’s take the spotlight.
The grocery store found itself in an unlikely bidding war through July, of which Fortress – flanked by Singapore’s GIC – currently leads the pack. Morrison’s popularity was in part thanks to its partnership with Amazon locking it into a digital future, but also a result of a wider explosion in investor appetite for UK businesses.
It is still early days in this upswing in buyouts after years of cold feet. The toll of Brexit left the private equity market for UK PLCs significantly underheated between 2016 and 2020 – FTSE 100 companies trade on average at 13 times the 12-month forward earnings of its companies, compared to 21 times for S&P 500 companies in the US and 17 times for the European STOXX 600. But just as soon as Brexit uncertainty was put to rest by a December 2019 deal with the EU, it was thrown back into orbit by COVID-19. Investors sat on cash through the height of the pandemic, and while the FTSE retained some respectability, it was outpaced by a feverish S&P 500.
Chart: FTSE 100 & S&P 500 growth, April 2020 – July 2021
Now, US private equity firms are beginning to stockpile on these undervalued shares. Before the Morrison’s bidding war, Asda had a takeover completed in early 2021. The Automobile Association (AA) was acquired for £219 million, while Signature Aviation was bought for £3.4 billion. The £41.5 billion invested in the first half of 2021 – about 3% of the size of the whole UK economy – is the largest over that time since records began in 2005. Like a housing market where buyers can sniff a bargain, private equity markets across the globe are being drawn in by the vibrant UK pools.
Yet while this may signify London’s – and by extension the UK’s – emergence from the stultifying uncertainty of Brexit, there are concerns. Private equity buyouts are notorious for debt leveraged purchases, which in the process shed the tax bill to the UK exchequer, and endanger jobs and future investment in favour of short-term foreign gain. Protests are likely to rise with increasing investment, particularly under opposition from MPs; that may cut a nascent golden age of investment short.
Beyond these concerns, risks still abound that could stop this buying frenzy in its tracks. The Northern Ireland protocol – ironically enhancing the difficulty of groceries and other goods making their way across to the disputed UK region – is causing the UK government to flirt with the idea of invoking Article 16 – a clause which unilaterally revokes the Brexit deal. That would put paid to any optimism among international buyers, and push UK PLCs back into hands-off territory as the country moves to WTO terms.
The other risk might be more daunting, as a potential cyclical drag engulfs Western economies. COVID-19 served to foster an expansionary fiscal and monetary environment which aided companies in the United States more readily than in the UK. While that appears to be taking shape in the latter as investors re-enter a bullish UK market, it may come as the US deals with the hangover of their own exuberance; inflation recently hit 5.4 per cent in the states in June 2021, increasing the volume of calls to raise interest rates. Any changes to monetary policy in the world’s biggest economy will inevitably filter through to London.
But each of these are risks that UK regulators ought to take – with assurances; the country has lost 7,500 finance jobs to mainland Europe since the Brexit vote, and questions remain about a long-term British strategy to ‘build back better’ and level up with manufacturing and technology growth. The risks outlined – particularly Brexit and global inflation – were there before this buying frenzy, and have accordingly been factored into their undervaluation. Investors in those companies, and by extension regulating MPs, should take heart in a new age of record-breaking growth in the UK market, even if for now it is just in stocks and shares.