Currency volatility may create significant investment opportunities for international sponsors, particularly those denominated in US dollars.

The British pound, for example, fell to an all-time low against the US dollar in September. At the time of writing, £1 was worth $1.13, down from $1.35 on 1 January.

“For US PE funds, the weaker pound could make it a good time to buy assets in the UK, should we be approaching the bottom of the pound’s fall,” James West, partner at Mayer Brown in London, told Private Equity International. “When the pound goes back up against the dollar, a lot of these funds could be looking at a significant gain simply from a rebound in sterling and a significant bump in future earnings of the target.”

These opportunities could reinforce a trend of US buyers scooping up UK assets in recent years. High profile examples include last year’s £7.1 billion ($8 billion; €8.2 billion) buyout of Morrisons, the UK’s fourth largest supermarket chain, by Clayton, Dubilier & Rice, and the £6.8 billion acquisition of the third largest supermarket chain, Asda, by TDR Capital. Blackstone president and chief operating officer, Jon Gray, told PEI in 2020 that the UK was “probably the most compelling developed market in the world” – an assessment made in no small part due to relatively depressed valuations in the UK compared to the US.

The UK saw £75.6 billion invested across 762 deals in the first half of the year, according to Pitchbook. Though below the historic highs recorded in 2021, the market has outperformed pre-pandemic levels of activity during H1 2022. In the mid-market alone, 391 deals were completed, with a combined value of £22 billion, according to KPMG.

“There will definitely be investors that see the issues in the UK right now as a great opportunity, because undoubtedly we are heading towards some kind of recessionary environment and that can only be good for valuations,” one UK-based investment consultant, speaking to PEI anonymously, said. “Next year is going to be one for opportunity.”

As Blair Jacobson, co-head of European credit at Ares Management, told the Financial Times’ Due Diligence Live event in October, “everything in the UK is on sale”.

This phenomenon is not only limited to the UK. The volatility of foreign currency exchange against a strong US dollar has seen a rise in the desirability of assets in a number of markets, Gavin Da Cunha, Asia managing director at treasury and risk management solution company, PMC Treasury, noted.

“There’re opportunities to invest when firms see foreign currency volatility and particular weakness in a currency – Japan being a good example; Europe being a good example; sterling being a good example,” he said. “We would expect to see US dollar funds thinking about this as one of the contributing factors that may mean that there’s potentially some good value to investing in those markets, because in dollar terms some of those assets will look pretty cheap now, particularly where the cashflows of those companies remain strong.”

Of course, there are other, longer-term, attributes that can make markets attractive against the background of currency volatility. The UK’s unique position as a capital markets hub, for example, means it will continue to be a key market for private equity investment. In December, the head of Europe private equity at Caisse de dépôt et placement du Québec, Albrecht von Alvensleben, told PEI that the UK offers opportunities to allocate significant amounts of capital across asset classes – something that cannot be said of all European countries.

Given its volatile nature, currency depreciation alone is unlikely to inform long-term strategic decision-making by sponsors, West noted. “Over the longer term we’re not expecting the currency volatility to impact the trend for PE funds to diversify the geographical spread of their portfolios.”

– Carmela Mendoza and Madeleine Farman contributed to this report.