Here it is then: private equity’s long-predicted raid on the UK’s ranks of mid-sized quoted companies. Last week, Dechra Pharmaceuticals, a veterinary medicine group, said it had received a potential cash bid of £4.6bn from EQT, the Swedish private equity firm. Then Network International, a payments processor in the Middle East and Africa, said it was in talks with the European private equity titan CVC plus Francisco Partners from the US.
On Monday, the Aberdeen-based oilfield services group John Wood, after putting up stout resistance for weeks, said it was open to talks with Apollo of the US. And Apollo popped up again mid-morning with a tentative approach to THG, the headline-hogging e-commerce retailer formerly called The Hut Group.
The reasons for this flurry of activity aren’t hard to guess. Would-be buyers are increasingly confident that interest rates are close to their peak, a crucial consideration for them given the quantities of debt that private equity tends to load on to everything it acquires.
The UK stock market, even after a good run, also looks cheap by international standards. And, now that Liz Truss and Kwasi Kwarteng are off the scene, the pound is no longer seen as a currency that can crumble after a mini-budget. So, yes, for a private equity industry heavy with cash that must be converted into real investments, the UK stock market is an obvious place to look.
London’s battalions of advisers, lawyers and hangers-on will be delighted but anybody worried about the long-term health and vitality of the UK’s stock market has fewer reasons to be cheerful. Some of these targets (think THG) may be suited to private life, but stock markets are still meant to be more than just a hunting ground for private equity’s raiders.
The decline in the number of quoted companies isn’t a London-only phenomenon, and nor can it be pinned solely on the 20-year-plus fashion for “private investments”. Even so, the numbers are remarkable: there were 2,101 companies on the UK’s main market in 2003; now there are 1,097.
What’s to be done? There’s little point bemoaning the existence of bids and takeovers. In a loose sense, a quoted company is up for sale every day. And, while one can grumble (justifiably) about fund managers’ short-termism, freedom to accept an offer is part of the share-owning game. It is more useful to ask why new companies aren’t arriving at the old pace. We’d be less bothered about leavers if newcomers took their place.
On that front, private equity’s less-publicised impact on stock markets is its ability to scoop up privately owned companies before they have even got close to a float, or IPO. Too often, the original backers regard a quick sale to private equity as an easier “crystallisation event” than jumping through the regulatory hoops of an IPO.
Here, though, is an intriguing idea within the many consultations to invigorate the UK’s capital markets: create a regulated platform that would allow private companies to operate share-trading windows – once a week, once a month, or whenever – as a stepping stone towards the public arena.
The aim is to lessen the perceived cliff edge between private ownership and quoted life. A company would get access to a bit of public market liquidity without the full-blown reporting demands of a proper IPO. Early-stage backers would be able to cash in a few chips, which might dampen their lobbying for an all-or-nothing outcome in which a trade sale too often beats an IPO. Big UK institutional investors would be able to test the waters, get familiar with a company and maybe, over time, exert influence in favour of the stock market.
The proposal is clearly not a cure-all (reforming the regulatory rulebook in areas where London’s setup just looks more cumbersome than other venues is probably more important). Nor is it likely to happen soon, since stock exchange officials are clear that some serious rewriting of rules would be necessary, not least to ensure equality of information between all investors while still preserving the looser touch of private life. Nor, obviously, would all companies on such a new platform convert to the full market. But, after a taster experience, some might.
At the very least, it is a genuinely novel idea since it isn’t being done elsewhere. If the London Stock Exchange wants to be “young and scrappy” to compete, as newish boss Julia Hoggett has argued, this is the sort of thing it should be trying. The dominance of private equity has gone too far.
