Ask any banker or lawyer who works in private equity how busy they are right now, and you’ll get the same answer, Ben Martin says in The Times. It is, one lawyer told him, “the busiest period we have seen in 20 years.” There have been three offers over £ 1billion for FTSE 250 shares last week – and so far this year 38 UK stocks (including RSA Insurance, William Hill and Aggreko) have become targets of merger or takeover worth around £ 42 billion.
You can see this as good news. Until recently, much of the rest of the world (and much of the UK, too) had fallen for the idea that Britain after Brexit would be a basket case. They have valued our assets accordingly – Simon French of Panmure Gordon (MoneyWeek podcast with him to come) believes that even after controlling our high weightings in low growth stocks, “UK SOEs remain undervalued between 10% and 15% compared to their international counterparts. “. It could be more: John explains in this week’s magazine that on at least one measure the UK is enjoying a 40% reduction compared to the US.
It is not really fair. Brexit uncertainty has all but disappeared (it’s not perfect, but at least we know where we are); the rollout of the vaccine in the UK was a resounding success; and our economy is now opening up and recovering well (maybe too well – GDP growth will be 6% to 7% this year and inflation is rising). So it makes no sense for the UK to attract a political discount (you could even say that we are in a rare period of political stability, so should demand a premium). That’s why private equity is booming: They know cheap doesn’t stay cheap for long – the UK market is so far up just under 8% this year.
Most MoneyWeek readers will, I think, be invested in UK value, and will be happy to see everyone come back to our way of thinking. I’m too. There is, however, one concern here – the shrinking of our public market. Private equity (PE) has been growing faster than public markets for years (three times faster since 2000). As long as interest rates are low (this is a debt driven activity) this is likely to continue. PE fans will say it doesn’t matter: as long as a business is well run, who cares who owns it? They are wrong; it counts. Private companies are not as visible or accountable as the ones listed, and people are noticing. A 2008 study by economist Alexander Ljungqvist even suggests that fewer publicly traded stocks can eventually lead to more anti-business governments. This makes sense: if voters can’t make a direct connection between the stocks they own and the companies around them, they might see no problem in increasing regulation and a growing tax burden on companies, for example. . After all, business is “someone else” and “someone else” is always the person who should be paying the taxes.
For now, we can worry less than we might otherwise – the initial public offerings are finally back (£ 32bn so far this year), offsetting mergers and acquisitions to some extent. But ideally, it would be better if the UK were slightly less attractive to PE – maybe we should buy before them. There is more on where to find value in this week’s magazine. Alternatively, if you’re so excited about the possible vacations that you don’t care about stock pricing, take a look at this week’s travel page. You will need insurance; However, as Covid-19 has opened up a whole new world of additional fees and exemptions for an industry that thrives on confusing details, you’ll need to read your policy even more carefully than usual. Don’t be surprised.