Business Explainer Private Equity and Capital Markets

Bargain Basement

Private equity’s hunger for London-listed ‘bargains’ has only added to the carnage. Lowly valued shares in British companies are a tempting target for private equity buyers, many of whom are sitting on a pile of uninvested cash.

Strategic ‘trade’ buyers are also in the throes of a tricky funding cycle, making it tough for them to finance acquisitions through traditional routes – either raising debt or issuing their own undervalued shares.

The solution? Get a private equity fund to help finance your bid.

The Financial Times reported this month (March), that this is exactly what Nasdaq-listed Viavi has chosen to do. The $2.3bn telecoms equipment maker has made a recommended £1bn bid for London’s Spirent, which will be partly financed via a $400mn convertible loan from Silver Lake, the US private equity giant.

It’s a win for the US company, a win for private equity, but another blow to the London market.

Game Changer?

In an effort to make London a more attractive listing venue, there is one plan that the stock exchange believes is a potential game changer. It wants to muscle in on private equity by launching an “intermittent trading venue” – a platform for founders, investors and employees in private companies to sell their shares in the absence of a market listing.

It makes sense for the London Stock Exchange to tap into this area of the market. Research by Beauhurst for Charles Stanley has found a record number of UK equity-backed businesses, nearly 20,000, which haven’t yet managed a sale or float. However, founders and employees are still looking for ways to cash in some of their equity.

It is not a new idea. Nasdaq Private Market has helped US private companies with this problem since 2013. Forge Global, a US group offering a similar service, is launching in Europe in partnership with Deutsche Börse. Other brokerages and crowdfunding platforms have also sprung up to help private investors take stakes in unlisted companies.

The LSE’s intention is to innovate by offering something that will make the market more attractive to prospective customers, by allowing private companies to test the waters. But, by offering a mechanism to help companies to stay private for longer, it may end up being counterproductive.

Long Shot

Since the pandemic, wealthy individuals have shunned traditional stock markets and turned to private equity and so-called direct deals, where they buy stakes in private companies on their own. Some believe private markets offer better returns over the long term, without the volatility of stocks.

However, this is strongly contested by others, who insist this is not the case when the performance fees charged by PE managers are taken into account.  In addition, the borrowing costs of financing PE deals – which depend on the prevailing level of interest rates – are unlikely to return to low levels in the foreseeable future.

As Jeffrey Jaensubhakij, the chief investment officer of Singapore’s sovereign wealth fund GIC (one of the oldest and biggest private equity investors in the world), told the Financial Times last year: “Many of the things that were tailwinds for the private equity industry have come to an end . . . and I don’t think they are coming back any time soon.”