Our fortnightly market commentary from members of our Senior Management team provides valuable insight into the latest trends, opportunities, and views on the current marketplace. Read about recent events within private equity, corporate finance, investment management, and real estate.
The UK M&A market is entering an interesting phase as we head towards the end of the year. Investor confidence continues to be tested, including striking manifesto promises being made by the two main parties contesting the general election. CityFibre’s immediate decision to suspend a major further investment in broadband infrastructure represented a visible response to a shift in political discourse. A bidding war for votes is not a benign environment for sensible policy-making and market conditions may well soften in the short term. The regulatory environment within the smaller companies sector also appears to be getting tougher in the aftermath of the collapse of Woodford Investment Management. Families and entrepreneurs require an increasingly steady nerve to navigate these dynamics skilfully.
I am often asked if I believe the commercial real estate market is at the end of its cycle. With a low inflationary environment, and most assets seemingly fully priced is it time for a market correction? I am of the firm view that all the fundamentals of commercial real estate and its non-correlation with bonds and equities still make it the ‘least worst’ asset in the investment universe.
The result of the upcoming election could be a trigger for a correction and most seasoned investors are sitting on their hands until after 12 December 2019. Sandaire Real Estate will provide a post-election update. However in the meantime for more detailed thoughts on the current investment market please download our latest Podcast entitled “Is Real Estate’s long run finally running out of road?”
While US Congress had pressing matters in relation to their President this week, a Financial Services Committee sat to discuss Private Equity practices. It has been reported that the hearing heard a debate that fell on partisan lines with the ubiquitous AOC, Elizabeth Warren and Rashida Tlaib having plenty of criticism for the industry – “we need to think about our economy not just in terms of returns” perhaps being the most stark of the warnings. It took my mind back to the House of Commons’ Treasury Select Committee inquiry into Private Equity in 2007 when the then chair of SVG Capital stated that people who run and invest in private equity paid tax at a lower rate than their office cleaners.
In the period since, the industry has evolved very significantly with the implementation of the Walker Guidelines for Disclosure and Transparency and the latest annual survey by the BVCA showed that all member-firms were now compliant. Annual performance summaries are now being issued and the latest report by the Private Equity Reporting Group showed, for example, that the average length of investment in a company is now 5.7 years and capital productivity growth exceeds public company benchmarks at 7.4% versus 0.6%.
The industry association now annually promotes Responsible Investing among the spectrum of LPs, fund managers and underlying portfolio companies with an annual awards event recognising best ESG (Environmental, Social and Governance) practices. The industry is introducing ESG best practice to private companies as part of the professionalisation of this investment sector. Within the industry, job creation and salary data within portfolio companies is measured. . The 2018 EY-BVCA Annual Report on the Performance of Portfolio Companies reported that in 2018 employment grew by 1.3% on a like for like basis and average annual employee compensation grew by 3.3% versus the private sector benchmark of 2.5%. In short the standards of reporting has come a very long way in ten years but already demonstrate the role of the industry in developing best practice in the private sector. Constant evolution is an inevitability.
In recent weeks, a number of respected strategists have published research notes indicating that we may be approaching the cyclical turning point of growth outperforming value, and the US outperforming everyone else.
One of the most important drivers of US outperformance over the past decade has been the steady appreciation of the US dollar, which, from an equity perspective, has had a dampening effect on Emerging Markets, as returns tend to be positively correlated with a weak dollar due to firms borrowing in that currency.
There are now signs that we may be reaching an inflection; US monetary policy has been loosened, relative economic strength appears to have peaked, investor inflows into technology stocks are abating and import tariffs on foreign goods – tariffs lower US demand for foreign currency – are not as serious as they could be. All in all we have plenty to occupy our thoughts as we approach the New Year.