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Snapshot: PwC’s head of UK PE talks terms and more

From PwC’s offices in More London, partner Philip Hines tells PEI about the UK PE market and what might be coming next.

Private Equity International sat down with PwC’s UK private equity industry leader Philip Hines to get his perspective on the key trends that have driven UK private equity activity so far this year, including terms, new funds, deals and exits.

New Funds

A rising number of new funds and spin-outs of employees from existing firms are entering the market and some are offering investors more flexibility on terms in order to compete for commitments, Hines said.

Hines, who has worked at the advisory firm for 17 years in deal due diligence and assumed his new role as head of private equity in March, commented that newer funds may be more willing to negotiate on fees, including on the two and 20 convention, how and when fees are charged, and co-investment opportunities.

New funds in the market include Freshstream Capital and Ventiga Capital led by former TowerBroook employees, and Mayfair that emerged from LDC.

When asked what is driving the trend, Hines said: “Naturally there are some individuals that want to develop their own firms. The fund raising environment supports it and there is potential to be more flexible on fee models and co-investments. There is no universal model. These organisations are smaller and want to differentiate themselves.”

On the other end of the spectrum, more European funds are positioning themselves as multi-asset managers in the vein of Carlyle or KKR. In addition to core private equity, they are also allocating funds to real estate, credit, and specialist vehicles such as energy and technology, Hines said.

“You see more firms like EQT for example that have multiple funds in multiple jurisdictions,” he commented.

Deals

In the UK, the total value of mergers and acquisition activity has been strong, led by corporate transactions, although the volume of transactions has been stable over the first half of 2015 compared to H1 2014, Hines said. The UK general election may have deferred some transactions in the second quarter, he noted.

Overall, there have been more deals of over £1 billion ($1.5 billion; €1.4 billion), such as the sale of UK retailer Newlook by Apax Partners and Permira for £1.9bn to South Africa’s Brait. This reflects the overall availability of debt and choice of debt options such as unitranche facilities, high yield bonds and new debt funds, as well as growing confidence in the UK economy and overseas investor appetite, Hines said.

“Buyers are more willing to do bigger deals,” he noted.

Among PE firms, deal activity has been sector specific with a notable amount in the restaurant and the trust and fiduciary service sectors, Hines said.

These include BC Partners’ acquisition of Côte from CBPE, Bowmark Capital’s sale of Las Iguanas, and Baring Private Equity Asia’s acquisition of financial services company Vistra Group.

Hines expects to see future transactions in the testing, inspection and certification (TIC) sector, which includes laboratories, and companies in the financial services sector, such as payment processing and foreign exchange brokers.

Exits

Exit activity has reached record levels driven by an active market for initial public offerings and overseas investors, Hines noted. “The cash returns to LPs are historically high,” he said.

Going forward, Hines sees more PE portfolio companies for sale pursuing a dual-track process and considering both public and private sales.

“Last year, companies focused on IPOs not dual track, but a few rumoured IPOs were ultimately sold to PE. Now, more companies are considering dual-tracking given uncertainty that the IPO window will remain open. Multiples are going up and the gap between IPO and PE price is closing for some transactions. Sellers are prepared to take the PE price rather than the IPO price that they don’t know yet,” he said.

IPO activity has been strong over the past 12 months and Hines said he did not see any reason for this to change.

UK IPOs have included car classifieds website Autotrader that listed on the London Stock Exchange in March and Sophos that listed in June, both Apax Partners portfolio companies.

Public market scepticism for private equity exits has abated as portfolio companies have been received well by investors, Hines said.

Price

Multiples remain high as PE firms compete with the likes of Canadian pension funds that can entertain lower returns, as well as overseas private equity firms, and foreign corporates searching for assets in the UK, Hines said.

“It’s a great environment for exits but tougher for entry. There’s more competition in the top end of the PE market,” he said.

And more entrants are expected to come. Sovereign wealth funds like the China Investment Corporation and the Abu Dhabi Investment Authority are not yet active in this space and are still more focused on co-investments. “No doubt in time they may do more directs,” Hines said.

Another effect of high multiples is a rise in bolt-on acquisitions and the emergence of sector specialist investors. “We may see more global champions emerge from specific niches,” Hines said, pointing to trust and fiduciary services and TIC sectors.