The convergence of unparalleled macroeconomic and geopolitical conditions made 2023 a challenging year for private equity. This marked a significant departure from the record highs in M&A activity experienced in 2021, and was the sharpest drop-off for private equity since the global financial crisis of 2008.[1]
A combination of the economic stalemate between buyers, who were suffering from higher interest rates and more expensive debt, and sellers, who were clinging onto 2019 multiples, has left close to $3 trillion in un-exited assets.[2]
Much of this has left industry experts questioning the future of the private equity ‘capitals’ of the world, such as London. But is it too soon to doubt the strength of the City’s position?
While certain sectors, such as infrastructure, technology and healthcare are certainly starting to see an increase in pre-deal activity, the current focus for PE firms firmly remains on value creation within their portfolios. Assessing performance metrics, identifying remaining upside potential, and recalibrating value assumptions are paramount as funds prioritize investments with the greatest growth prospects while they streamline operations. Additionally, with a large portion of deals struck in 2019 or prior however, a wave of refinancing is due. In a higher interest rate environment firms will have to work out how they can help their portfolio companies best manage this challenge.
Combined, these factors have often invited scrutiny over London’s status as a global financial hub, particularly given the influence of Brexit and that other European cities now have regulatory advantages to attract businesses displaced from London. That being said, there are also plenty of reasons why the UK capital remains one of the most promising global destinations for PE firms to address the current challenges facing the market, with today’s funding environment also more upbeat.
Firstly, with 547 active venture capital and private equity funds in the UK, of which 381 are headquartered in London[3], the city’s appeal as a fundraising destination remains unrivaled in raw numbers. London-based private equity firms will hold a significant surplus of capital, creating fertile conditions for growth in the UK market. In addition, the regulatory environment and the significant presence of professional services firms can provide the much needed support for PE firms to navigate the coming year.
London is a hub for professional services
One of the key pillars of London’s appeal to private equity and venture capitalist investors is its extensive network of legal, financial, and consulting services. Being home to over 90,000 financial and professional services companies, with over 200 foreign banks and more bank head offices than anywhere else in the world, London is perfectly set up to accommodate the needs of the sector.[4]
The city is also host to some of the world’s most prestigious law firms and consulting companies, which together help play a vital role in facilitating and executing private equity transactions. From conducting due diligence to structuring complex deals, these service providers offer invaluable expertise and support throughout the investment process.
The alignment of private equity fund headquarters with London’s professional services headquarters fosters seamless collaboration, allowing regional offices and portfolio companies to work together effectively. Another prevailing attraction for businesses centers around London’s proximity to Europe, its history as an international trading powerhouse is underlined by the UK commanding a substantial 38% share of the global foreign-exchange turnover[5]. This clearly pins London as a significant player, where funds based in the city have unparalleled access to capital flows from across the globe.
Private equity in London is here to stay
Recent agreements enabling the UK to rejoin the EU’s Horizon Europe, a key funding program for research and innovation, alongside support from the British Private Equity and Venture Capital Association (BVCA) signifies a pivotal step towards fostering growth and innovation across the country. With Britain’s substantial pension industry managing assets totaling £2.5 trillion[6] and the association proposing a 5.0% allocation to fast-growth tech companies[7], the impact could be transformative.
This allocation could address funding gaps, especially during phases requiring large investment rounds. With London holding its position as Europe’s foremost tech institution in 2023, the forecast is promising. Of the private equity and venture capital funding rounds secured by high-growth companies in the capital, 70% have gone to either seed or venture-stage businesses[8] and there is continued support for emerging companies in the current environment.
The ascent of fintech, biotech, and sustainable technologies is also set to attract considerable investment, with private equity and venture capitalists in the capital primed to benefit.
While challenges may persist for private equity this year, there is little question of whether the city has retained its PE crown. The resilience and adaptability of London’s financial ecosystem, coupled with its strategic positioning and commitment to innovation, position the city at the forefront of global private equity and venture capital markets. Looking ahead to 2024 and beyond, London remains a beacon of opportunity, where collaboration, expertise, and capital converge to drive transformative growth.
**********
Jan Timmerman is European Lead, Private Equity Portfolio Operations at Kearney
Footnotes
***
The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group
