Private equity: an opportunity or threat for quoted portfolios?

Business team investment trading do this deal on a stock exchange developing new approaches.

“The growth in private equity activity demonstrates a number of trends. Firstly investors are seeing more potential value or less competition in buying quoted companies rather than buying assets from another private equity house in a secondary transaction. Secondly it shows the prevalence of ‘dry powder’ capital in private equity funds and the current accommodative debt markets supports their ability to bid for quoted assets; and finally, the level of interest in UK listed companies from US-based private equity companies seems to imply there is a perception that UK quoted companies are attractively valued versus their international peers.”

Jonathan Winton, Co-Manager of Fidelity Special Values, said: “The number of M&A bids we are currently seeing by private equity groups and other corporates highlights how attractive UK companies’ valuations are in an absolute sense, and relative to other geographies and the more expensive parts of the market. Many UK-listed companies are market leaders in their industries with attractive growth potential, and with Brexit in the rear-view mirror, companies and acquirers are more willing to commit to making new investments in the country. These dynamics along with the current availability of capital means we’re likely to see more bids if the valuation discrepancy remains in place.”

Outlook for the UK

James Henderson, Co-Portfolio Manager of Lowland Investment Company, Henderson Opportunities Trust and Law Debenture, said: “In my view, valuations in the UK are too low given the level of long-term interest rates. Additionally, corporate earnings have enjoyed a strong recovery as companies have taken out costs in recent years and now sales are growing. This has resulted in improved profit margins and the extent to which this is happening has led investors to be pleasantly surprised at the level of corporate earnings growth.”

Ian Lance, Portfolio Manager of Temple Bar Investment Trust, said: “The outlook is positive based on two factors. Firstly, the very low starting valuation relative to other markets and, secondly, high exposure to the cheapest sectors such as energy, materials and financials, and low exposure to the most expensive sectors such as technology.”

Ed Wielechowski, Manager of Odyssean Investment Trust, said: “Whilst markets have run hard since the nadir of March 2020 and overall ratings are above long-term averages, we believe that there remain good investment opportunities in the UK equities space. Earnings growth is likely to remain above trend for the medium term due to the recovery of domestic and international economies. We are still able to find companies, typically with international earnings, where this recovery potential has in our view yet to be priced in. Equally, we are finding some interesting reasonably priced growth companies, as the market has been focused on domestic cyclical recovery situations.”

Jonathan Winton, Co-Manager of Fidelity Special Values, said: “The near-term economic outlook is encouraging with Brexit now in the rear-view mirror, most remaining restrictions related to COVID-19 lifted and real-time data suggesting a continued rebound in activity, back to pre-COVID levels in some instances and even ahead in certain areas. The UK is predicted to grow at the fastest pace of the major developed economies providing a good backdrop for UK corporates. UK equities are significantly undervalued compared to global markets, and reasonably valued in absolute terms. While the UK market has looked cheap over the past five years, the key difference in 2021 is that fundamentals on the ground look very good. This backdrop has helped us find attractively valued companies of better quality than would normally be the case, which is reflected in the continued elevated gearing level in Fidelity Special Values.”

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