UK election: short-term effect will be ‘very negative’

Friday’s hung parliament election result means British private equity faces a challenging road ahead.

A “car crash” – that’s how the director general of the industry body representing the world’s second-largest private equity market summed up last week’s UK general election. It had resulted in the conservative party losing its majority, a hung parliament and further fog decending on the Brexit process.

Three days later we are still in the dark about several key points – issues that affect the private equity industry across various areas. Prime minister Theresa May has said she will seek to form a government with a Northern Ireland right-wing conversvative party, while the opposition leader Jeremy Corbyn told the BBC he can “still be prime minister”.

The uncertainty and volatility accompanying Friday’s election result means UK private equity now faces several challenges, market participants told Private Equity International.

The short-term effect of the hung parliament result is going to be very “negative indeed on consumer and business confidence,” Guy Hands, Terra Firma Capital Partners’ chief investment officer, told PEI.

“Undoubtedly, there will be increased volatility in the UK economy,” Hands said. “For private equity investors, who are mainly non-sterling based, the decline of sterling could however provide significant buying opportunities.” He noted that in the long-term it will likely result in a better Brexit or no Brexit – a positive for the UK.

The pound suffered its biggest one-day fall in around eight months on Friday, stabilising on Monday against both the dollar and the euro in morning trading.

Too many political shocks are not good for business and the UK “cannot continue to be led from one direction to another,” Hands said. “There has to be compromise and the realisation that political opportunism is destroying the UK and what businesses need is a stable environment.”

In a survey by Coller Capital released on Monday, limited partners cited economic and currency volatility as the second-most significant risk to private equity returns over the next few years. More respondents chose this as a concern than protectionism, regulatory change, competition from corporate buyers and changes to taxation, the firm found in its Global Private Equity Barometer Summer 2017.

In light of Friday’s result and the continued uncertainty surrounding how the British government will negotiate Brexit proceedings, the UK mid-market may lose its attractiveness, according to Fabien Prévost, chairman and chief executive of Paris-based Omnes Capital.

“The silver lining is that human and financial capital will favour continental Europe over the UK now,” Prévost said. “With many of the key European elections behind us, and a greater sense of a unified union, I think that investors and PE executives will see European PE as a more attractive asset class than UK mid-market.”

Asked how last Friday’s election result will affect European private equity, Prévost said: “Very little – I think the UK needs Europe more than Europe needs the UK.”

UK deals already in the pipeline will likely be unaffected by the election result, according to law firm Hogan Lovells’ global head of private equity. “In terms of deal activity, in the UK at least it is a seller’s market with a cheap pound, and there’s lots of overseas money out there looking to find a home,” Tom Whelan told PEI.

“I’m aware of lots of deals in the pipeline for the second half of this year and I get the impression that Q4 will be busy, notwithstanding the election result.”

–Additional reporting by Toby Mitchenall, Claire Wilson and Rebecca Akrofie.