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.
Private equity activity across Europe continues apace, with funds continuing to see value opportunities and fundraisings concluding successfully notwithstanding choppy public markets and concerns over global economic stability.
In the UK, the leading hub for private equity firms in Europe, activity remains equally strong and this activity is extending into public markets too this summer with Advent’s £4bn bid to acquire FTSE 100 aerospace components manufacturer Cobham plc. Typically the first sector to see a reduction in investor sentiment amid concerns of an impending slowdown is the consumer sector. The UK retail and restaurant sectors, historically both strong areas for private equity activity, are going through very significant structural changes with changes in consumer behaviour, the impact of local authority business rates and employment on-costs. However it is encouraging that there are segments of the market which continue to be strong.
The other bellweather of UK consumer demand and a mainstay of private equity activity over three decades, is the pub sector. This sector has proved resilient with like for like sales growth seen in 19 of the past 24 months. Significant private equity activity continues to be seen here, for example again in the public markets, the recent announcement that private equity owned Stonegate Pub Company has agreed to acquire Ei Group plc, valuing one of the earliest pub sector buyouts that later floated at £3bn. This will create the biggest pub and bar group in the UK. This follows two other large private equity deals in the sector in the past year and a total of 15 in 2019. Private equity firms have long had a habit of identifying sectors that offer value that leads to a wave of dealflow. This vote of confidence in the UK consumer sector given wider macro questions is very encouraging.
We are currently experiencing differentiated levels of activity between individual segments of the UK M&A market. The vibrancy of deal-flow with regard to listed companies within the FT250 and FT350 indices, has slowed progressively this year; influenced by the deteriorating outlook for global growth and increased market volatility. By contrast, the level of transaction activity involving unlisted companies and family offices has remained relatively robust. In the short term, our clients evaluating investment opportunities are tending to conduct more extended due diligence exercises, as they contend with more limited forward visibility regarding future trading performance.
A synchronous weakening of growth induced by trade tariff and de-globalisation concerns has been followed recently by soft data out of Germany and China. Market commentators seem to have concluded that pent up stresses in the global trading and security system have reached a tipping point. On top of these secular worries is the realisation of a police build up across the border from Hong Kong, and that China is about to have a “Tiananmen moment”. As a consequence, stock markets have universally sold off in favour of safer haven government bonds such that US 10 year bond yields have fallen to below shorter term yields, historically an indicator of a recession ahead, albeit more so in the US than the UK.
The current sell-off looks similar to the 2015-16 correction and back then the market fell another 10%. However, when comparing current data in respect of retail spending, equity valuations, sentiment factors, corporate behaviour & profitability, then even if balance sheets are a little stretched, the current situation looks significantly better for equities than back then. Perhaps it’s time to buy the dip?
Temple Quay House, a 154,000 sq. ft. office building in central Bristol has been sold for £73.35m. At 4%, this is possibly the lowest yield paid for a sub 20-year office investment outside of London albeit one let on an 18 year lease to a government agency. Bids from domestic and overseas buyers drove the final sale price to almost 25% above the initial quoting price of £60M. This demonstrates the continued flight-to-quality for well-let assets in prime, well-connected locations and the added value that overseas buyers can derive from purchasing UK assets at the present time. There are many considerations in the acquisition of this type of investment including location, lease terms, tenant covenant, passing and Market Rent as well as obsolescence. The Sandaire Real Estate team are well placed to source and carefully evaluate similar quality investments in lot sizes upwards of £5M for retained clients of the firm to suit individual investment criteria.
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