Real Deals UK Private Equity sector report: top three takeaways

Real Deals published its UK midmarket report in September 2023 which we were pleased to be a part of. The report explores the ways in which the UK midmarket can emerge from a difficult period stronger than ever.

The midmarket has seen some success in an uncertain economic climate

The midmarket is subject to divergent views at the moment. Clearly the macro-economic environment and inflation in particular is having a significant impact on the cost structure of investments. However, there are a lot of opportunities for those who can find the right strategies.

"If you can dig into the nuances and niches, then you can still find lots of amazing businesses that are proving very resilient... obviously, the market for bolt-ons continues to be very buoyant as well."

James Tetherton, Senior Partner and Co-Founder at GRAPH

This positive view is based on the reality that GRAPH has seen growth this year, largely by spreading the type of work that they do. James reflects that there are huge upsides opportunities for the people who can find the right strategy and keep making investment: "there are lots of opportunities but there are also risks. You've got to be very nimble in what you do. If you are nimble, you can succeed!"

The report also cites Kartik Shah, Apex's Global Co-Head of Product, who argued that there has been shift away from larger deals but with the "midmarket staying more resilient and specific sectors such as business services, energy and TMT remaining attractive", with the slowdown in debt markets and uncertainty also meaning more focus on buy-and-build. In the last 12 months, regional models have also continued to be hugely important, and will help PE firms improve any reputational issues (see more below) by engaging more with local authorities and communities across the country, thus breaking away from the 'London bubble' association.

As specialists in supporting clients with buy-and-build strategies, we have been at the forefront of this growth in the mid-market as Matt Stoate summarised recently:

“The first half of 2023 has not been the most prolific for deals in the private equity industry, with many funds focusing on active management of their portfolios. This plays to the strengths of the team at Foot Anstey. Our ability to adapt, leverage new technologies, and identify promising investment opportunities has been crucial to our success. We remain committed to driving innovation, fostering sustainable growth, and creating value for clients."

Matt Stoate, Head of Corporate and Private Equity at Foot Anstey

An image change is important

"PE does have to worry. The broader industry is certainly going through a period where reputational risk is of increasing importance. The scrutiny on businesses doing the right thing is even more important, as is the scrutiny on LPs putting their money in the right homes and being accountable for people behaving appropriately. Firms that don't think about this carefully and address it will struggle at some point regardless of their financial returns".

Andrew Gregory, CEO of BGF

Reputational issues in the media result from the perception that PE funds invest money into businesses in a costly manner through preference shares that attract high yield, and exercise management overreach in board meetings. The report also suggests that clients PE backed businesses bemoan the price increases each time

Firms need to be awake to this. Chris Cormack, Partner at Endless, is quoted as saying that the mid-market needs to 'highlight how value is created, job creation, innovation and growth". This means focussing on the human benefits and embracing principles of transparency and diversity, as well as working with a potential new labour government to show that PE can work in partnership with public sector projects.

Mid-market firms can take steps to get the most out of their portfolios

As part of the Real Deals UK Midmarket Report 2023, Foot Anstey's Claire Holland, Employment Partner, and Adam McKenna, Corporate Partner, gave their insights on how the private equity midmarket can get the most out of its existing portfolio, the challenges that come from this and the importance of preparing for the future.

There is increased focus on post-acquisition integration

When looking to grow through an acquisition, it's crucial to identify your primary drivers, whether this is increasing marketing share, broadening reach into a new market or scalability through driving synergies. Over the last 12 months, we have clearly seen an increased focus on post-acquisition integration to boost value from bolt-on acquisitions. This work should begin well before any binding bids are approved, as this ensures integration is a prime focus and results are delivered by the time your business returns to business as usual.

Due-diligence is crucial for meeting new challenges

Information gathered from due-diligence is hugely valuable and should be centralised so easily accessible to both sides. This allows greater transparency and enables greater cooperation between buy and sell-side teams to avoid duplication of work and to streamline processes. By forming a detailed integration plan prior to completion, firms can clearly identify risks and ensure performance milestones or restrictions as part of the deal can be viewed through a post-acquisition lens, particularly if a firm has agreed earn-out or deferred consideration payment structures.

Understand the relationships and dynamics of a business

Businesses are only as good as their people, so due diligence on the human dynamics within a business is crucial. Cultural differences can cause tensions where two organisations come together and can create a sense of uncertainty or instability amongst employees. Differences need to be identified and acknowledged, and the emphasis needs to be on creating a unified culture which reflects the best of both organisations. In doing this, your people will feel part of the journey towards a bigger and better integrated business.

Manage portfolios to ensure optimum exit readiness

Our specialist private equity team work closely with clients to create value from their existing portfolio. Our cross-discipline team understand PE portfolio companies and the need to balance the interplay with funding arrangements and house expectations against strategic operational and BAU advice, always with exit in mind.

We work with clients to understand their aims and objectives so we can provide strategic advice throughout the investment lifecycle on how these can be achieved. We have also developed a bespoke governance information portal, GRIP – a one-stop shop for monitoring portfolio, tracking the performance of companies and access relevant compliance documents, all at the click of a button.

Read our full article from report.