Britain may currently be navigating through uncharted geopolitical waters, but that isn’t putting too much of a damper on the spirits of one of the UK’s oldest private equity houses. Equistone, a former Barclays division which is celebrating its 40th anniversary in the UK next year and last month raised its largest-yet €2.8bn (£2.5bn) fund, is thriving.
Since over-shooting its €2.5bn target in mid-March, in a fundraise which lasted a speedy four months, the firm has already nabbed three deals. A greenhouse business, payment services firm and mobile mast operator may not sound like they have much in common, but Equistone is banking on them all to funnel in the returns.
And while Equistone has a mandate to invest across the UK, France and Germany, with offices scattered across each country, two of the recent trio of deals have been backing UK-headquartered companies.
“At the moment the focus is absolutely across the geographies,” says Equistone’s Rob Myers, denying any suggestion that the UK might be sidelined until the effects of Brexit become more clear.
Though Brexit is a significant unknown, such a climate is not entirely foreign to pan-European private equity houses. “It’s interesting the way these things shift – when we were raising Fund 4, around 2011, at that time investing in the EU appeared very difficult,” says Myers. “When we met our US investors, all they wanted to talk about was whether the EU as an entity was going to survive.
“Now we come through to 2018 you have underlying EU macroeconomic performance which is attractive, a UK economy which is not growing as fast as the EU or the US and which does have exposure to a set of specific risks. That may cause a slowdown in attractive investment opportunities – but it may not.”
The silver lining
In some ways, Brexit is being seen as an opportunity. A slew of “staycation” deals followed the UK’s decision to leave the EU and sterling’s subsequent slide, from Phoenix Equity Partners’ purchase of Forest Holidays to Canadian firm Onex snapping up caravan giant Parkdean Resorts.
“We bought the UK’s largest static caravan manufacturer last year, Willerby,” says Myers. “It’s performing well in a market that is thriving off the back of staycations. There are a significant amount of people who, due to the depreciation of sterling, actually look at the prospect of staying in the UK for holiday rather than travelling to Spain, for instance.”
Added to that, a drop in the value of the pound against the euro has been a “double-edged sword”, according to Myers. While some businesses, whose raw materials are denominated in euros, have suffered input cost inflation which must be mitigated, others exposed to international customers have performed well.
But despite the obvious wobbles in sentiment which Brexit has brought, Christiian Marriott – Equistone’s head of investor relations – noticed that some events in more recent memory even topped Brexit on investors’ shopping list of concerns. “Before [French President Emmanuel] Macron was elected, people were worried about France in the context of a Le Pen victory – or even near-victory – and what that would mean for the political and economic environment in France. Once Macron was elected there was an outpouring of euphoria, which was quite helpful,” Marriott says.
The asset class to weather the storm
A number of figures in the private equity industry have told City A.M. recently that investors and fund managers alike are becoming more wary of the often high prices paid for assets, among murmurings that the market could be reaching a peak.
Though far from blasé, Myers is confident that the world is not about to fall down around financiers' ears.
“We’re in the ninth year of a bull market, so we’re facing issues we’ve been facing since 2014,” he says. “Valuation is always relative – some of the best returns that we’ve ever generated have been from assets for which we paid high prices.”
Marriott adds: “I think one thing investors have realised, having come through the financial crisis, is that private equity can withstand that. Investors are now looking at a number of their managers who have generated pretty credible returns on those [crisis-year] vintages.”
Though there is strength in the market, Marriott believes some UK-focused “vanilla” private equity houses may struggle as Brexit necessitates managers to find truly hardy businesses. Already this year has seen the fundraise of Eat's owner Lyceum flop, as the firm blamed a confluence of factors “unrelated to the firm” affecting investors.
But at the same time, recent data from funds marketplace Palico shows first-time funds are proliferating. New blood is still flowing into the sector and, as Myers puts it, natural selection will ensure only the best survive.