Pension funds and insurers are afraid to invest in UK-focused private equity groups, suggesting that Chancellor Quasi Kwarteng’s financial plan that triggered the crisis has also reduced the UK’s attractiveness to some global investors.
The fall of the pound to a record low against the dollar this week has reduced the value of foreign investors’ investments in British private equity funds focused on British businesses. However, industry representatives said it was becoming increasingly difficult to convince them to bet on the country.
Sunaina Sinha Haldea, head of global private equity at Raymond James, said the Continental European asset management firm had refused to invest in the UK private equity fund, citing the country’s „current turmoil” and adding that they would not be considering UK funds for the foreseeable future. the future.
In addition, some are asking: “What is the point of transferring money to a British manager who can buy companies cheaply if inflation is out of control and a longer recession is possible? How are these companies going to make money?”
“People say they are not investing in the British economy right now,” she said. – Scary”.
Private equity firms around the world are finding it increasingly difficult to raise funds as interest rates rise, and investors are becoming risk-averse after years of piling up in private markets.
However, some advisers expect it will be easier to raise funds elsewhere.
One consultant who helps private equity groups raise new funds said they chose not to work for a UK-focused group because it would be „much harder” to attract global investors than it would be for a US-based private equity group.
“Many people think that we are going through a crazy period – it’s a bit like the first days after the first [Covid-19] lockdown,” said Claire Madden, a managing partner at Connection Capital, which advises investors in private markets.
Investors „don’t know how things will play out, so [they] aren’t going to be making any long-term or short-term investment decisions at this point,” she added.
However, she said a weak pound, the prospect of buying cheaper companies and the UK’s status as „one of the most well-organized private equity markets” could attract international investors in the future.
Investors are waiting
Pension funds have been selling off easily traded assets at a rapid pace this week to meet margin calls associated with hedging strategies. They weren’t able to immediately sell private equity and venture capital stocks because such sales take a long time, although they have been on the rise this year.
Many investors find that when they sell publicly traded assets or see their value drop, they also have to sell private assets such as private equity and private equity funds, due to a phenomenon known as the „denominator effect”. „.
This is because the total share of assets that can be allocated to private markets is limited. When publicly traded assets drop in value and private assets don’t drop as much, they can go over the interest limit.
“We are seeing a lot of attention on this issue,” said Garvan McCarthy, chief investment officer for Europe, Africa and the Middle East and Asia at asset management firm Mercer, adding that it will not only affect UK private equity funds. but also others who invest all over the world.
“New liabilities for unlisted assets are being reviewed or suspended at the moment,” he said. “The bigger issue is whether you allocate funds at all [to private funds] because of the illiquidity of the underlying assets.”
According to him, some companies may suspend the fulfillment of obligations for the next six months.
Wednesday became a „nightmare” for a large asset management company. Investment director Sinha Haldea said they had to sell assets to meet margin requirements, putting a stop to a planned sale of shares on the private market.
However, global private equity groups, which have already raised large sums of money, are still eager to buy UK companies, especially if they have funds in the US, although they warn that it will be difficult to raise debt financing for these deals.
“For an international investor, this looks [like] a lot of value in the medium term,” said the head of one of the private equity groups that operates around the world. “You don’t get opportunities like this very often, especially if you invest in dollars.”