Investors appear to be divided on the attractiveness of UK private equity following the Brexit referendum.
Conversations Real Deals has had with market participants recently suggest that some investors are bullish about prospects for UK private equity on the basis of the overall strength of UK businesses and expectations that currently high prices for targets in the UK may fall.
However, the concerns of some LPs about the implications of Brexit, particularly given falls in the value of earnings for sterling businesses accompanying the fall in the pound, are deterring them from backing funds purely focused on the UK.
Nationality appears to be having an effect on which side of the divide LPs fall. Some US investors in particular are seeing opportunity in the UK, as shown by their significant participation in recent raises including Tenzing Private Equity’s first fund.
US interest in UK funds may also be heightened by the depreciation of the pound, which makes investments in sterling-denominated UK funds of better value for LPs holding dollars. However, one pan-European GP suggests that some US investors in UK funds may lack a full appreciation of all the potential implications of Brexit.
Investors choosing not to invest in the UK, meanwhile, tend to be based in Europe. Despite the fact that exchange rates are also in euro-denominated investors’ favour, some continental LPs are showing signs of nerves about the uncertainty induced by the result of the Brexit referendum.
As early as last summer, Real Deals reported that some French LPs were hesitant about backing UK funds. Since then, at least one major French LP and two German ones have placed a moratorium on UK funds, Real Deals understands.
GP sector focus may also be having an effect on LP’s decision-making on UK funds, suggests Sunaina Sinha, managing partner at placement agent and secondaries market adviser Cebile Capital.
“[With] the select LPs who have made that call [to not invest in a UK GP], the GPs that they have chosen not to back will likely be those who might have most exposure, say, to the consumer sector. [The LP is taking a view] that those who are going to benefit from Brexit and a lower pound are manufacturing businesses…[while] the consumer sector will get particularly hurt in the next few years,” she says.