It’s been quite a year and although the political shenanigans are nothing compared to 2022 (with 4 chancellors and 3 prime ministers), there’s been no shortage of what you might call – action!
The near collapse in capital markets activity continued throughout 2023 and that has led to some significant changes in the make-up of the UK market. Outflows from the traditional backers of UK equities have now stretched to 33 consecutive months putting continued pressure on valuations and encouraging de-equitisation. In the FTSE250 alone, 82 of the constituents are now Investment Trusts. That number was 20 some 15 years ago. 30% of the FTSE250 index is now held by passive funds, there have been no meaningful IPOs in the UK for nearly a year
There were 40 public market M&A transactions of more than £100mn last year, for an aggregate value of £21bn. NONE in the FTSE100. Average premium was 51% and despite that, six companies got a bump in price following the initial bid. 58% of bids or £15bn came from financial buyers, 55% of bids were from overseas. When you look at where that activity took place, 9% of AIM and 8% of the FTSE small cap vanished….
And why has UK stock market performance been so bad..
A combination of the following: the lack of UK investment into UK assets - we cannot be a global financial centre without a thriving domestic market. Overseas investors now own 60%, yes 60% of the UK market. The entire UK market is smaller than Microsoft. The dramatic underweighting by pension funds – from 44% in the UK 25 years ago to just 4% today; wealth manager focus on global portfolios, tax changes – stamp and dividend tax, liquidity, market relevance – a vicious circle, cost of capital and also the IPO moving from a badge of honour to a perception of it being a burden and in the last 5-6 years the ‘privatising of gains and socialising losses’ as PE extracted maximum value then floated. Wealth creation needs to be embraced and celebrated – and without doubt needs to be rooted in the UK so that companies can access growth and capital in UK public markets.
Let’s just think about private equity for a moment – that industry has relied disproportionately on rising multiples and revenue gains to generate returns while margin improvement has contributed practically nothing. That no longer works when rising rates serve as ballast for asset multiples.
The ‘exit’ conundrum is now emerging as one of the most pressing problems. I have often used a not very nice term but there is a sense of constipation as portfolio companies build up. So, no shortage of pressures to sell but also pressure to deploy with record levels of ‘dry powder’ contributing to the significant de-equitisation we have seen in public markets. It’s probably no surprise that with three of our M&A team having had secondments to the Takeover panel, one of the busiest areas for us this year has been defence briefings.
But – we do seem to be edging towards a Mrs Doubtfire solution. As she famously said… ‘help is on the way’… the reform agenda from our regulators is certainly helpful to the supply side of potential market issuers. However, and critically, the damage repair needs to come also to the demand side. Specifically bringing liquidity back to the UK equity asset class. The recent budget policies including the British ISA and more importantly pension fund disclosure of holdings will certainly over time make a difference.
Steven Fine
Chief Executive, Peel Hunt
