PE’s Brexit plays: aerospace, clinics and recruiters

A BCG study predicts the UK sectors most likely to be disrupted by the UK’s decision to leave the EU and throw up opportunities.

The disruption caused by Britain’s momentous decision to leave the EU could throw up a multitude of opportunities for private equity buyers, and there are a few sectors that could prove to be particularly fertile hunting grounds.

A new study from Boston Consulting Group entitled Why Brexit Offers Opportunities for Private Equity explores the extent to which Brexit puts different UK companies under stress.

“Our message is discontinuity creates opportunity for the smart, analytical investor that’s willing to take a calculated risk, especially when other people might be more risk-averse or constrained in what they can do,” Antoon Schneider, a partner at BCG and one of the authors of the study told Private Equity International.

The study identified 40 sectors which “have an intrinsic fit with private equity”, and analysed the likely impact of Brexit on each across five areas: foreign exchange exposure; dependence on EU labour; terms of trade; exposure to EU regulation; and growth constraints.

From this, the authors identified four key sectors with both a high number of large UK companies and a high impact from Brexit, mostly due to a heavy dependence on EU trade, workforces or regulations: industrial distribution; private medical clinics and laboratories; aerospace manufacturing; employment and recruitment services.

“These are areas where you should go hunting because things are in flux, and therefore there may be opportunities,” Schneider said. “The flux is sometimes negative, sometimes positive, sometimes a bit of both, but things are changing.”

In the study, the authors suggest that as private equity firms step up due diligence on potential deals, they categorise Brexit uncertainties into the five effects identified and then, where possible, estimate the value and likelihood of each of the effects to generate an “uncertainty map”. This will help to reveal the most promising Brexit plays.

Schneider said that for firms’ existing portfolios – particularly for those with euro- or dollar-denominated funds – the immediate impact of the Brexit vote has been negative.

“Both the currency and lower expected economic growth isn’t good either, so you have a double whammy,” he said.

However, when it comes to new acquisitions, Brexit uncertainty could go some way toward lowering entry prices. Private equity firms, many of whom have freshly-raised funds, also have a significant advantage over trade buyers and IPOs.

“I think private equity [firms] generally feel that they are good at analysing uncertainty and they are willing to take calculated risk at a time when corporates may be less willing to do so. Plus IPOs are harder because of uncertainty, the stock market isn’t particularly good at high uncertainty either,” Schneider said.

“Other buyers might be more hesitant in this time of uncertainty, whereas [private equity firms] take a portfolio view, they feel they can take calculated risk. They can price risk, that’s what they do for a living.”