Executives said that many private equity deals have been cancelled, as sellers gauge the impact of the UK’s vote to leave the European Union on trading.
Paul Dolman, a partner at law firm Travers Smith, said: “Brexit has had an immediate impact. We’ve seen a couple of deals pulled as people want to take stock for the next month or two.”
UK private equity deal volumes slumped in the first half of 2016, with the Brexit vote likely to further depress activity. Financial sponsor-backed M&A dropped 92% to just $ 1.64 billion in the first half of the year, compared with the first half of 2015.
The founder of one London-based mid-market private equity firm said that he had heard of three deals that had been agreed with money waiting in an escrow account, but the deals had been cancelled straight after the referendum result was announced.
“If that is anything to go by, this could be a pretty difficult time,” he said. “There will be a significant impact on deal volumes.”
Telefonica shelved its sale of telecoms company O2 on June 29, according to regulatory filings. The company had previously attracted interest from Apax Partners, Blackstone and CVC Capital Partners, according to reports in Sky News.
Eric Lawson-Smith, a partner at Arma Partners, said: “No one quite knows what impact Brexit will have, but anyone looking to make a sizable, leveraged investment now could potentially look a bit stupid in a year.”
David Walker, a partner at law firm Latham & Watkins, said he had seen deals that were at an early stage being put on hold: “It will definitely quieten down over the summer. I would not say everyone is packing up and going away but there will be a bit of a pause.”
Instead of completing deals, private equity firms are assessing the impact of the vote on their European portfolio companies, including the effect of the weakened pound, a potential economic slowdown and a drop in interest rates on trading and financing packages.
Dominique Gaillard, head of direct funds at Ardian, said that the French private equity firm had started “collecting and monitoring” data on the positives and negatives of Brexit on its whole portfolio.
Andrew Ferguson, partner in Baird Capital’s UK private equity team, said: “In the immediate aftermath our first thought was to turn to our portfolio. We’re going to spend the rest of the summer looking after our portfolio and spending a lot of time with [our] CEOs and CFOs.”
He added: “There are no gold stars for trying to be a hero and ending up looking stupid further down the line. [Investors are] going to be more risk averse and investments will require a higher degree of risk assessment.”
Charlie Johnstone, origination partner at ECI Partners, said that the firm was “still out hunting for good opportunities” but added: “We are in this massive uncertain world: How do we deal with that?”
While there is expected to be a slowdown in UK private equity deals, opportunities remain for distressed investors, real assets and private debt. A report by KKR on global macro trends released on June 30 said: “Given the shift towards negative interest rates and ongoing and intensifying regulation of the banks, we are seeing a major spike in opportunities in the mezzanine and asset-based lending areas of the global economy, Europe in particular.”
Additional reporting by Jessica Davies