UK capital markets and IPO activity have taken a significant hit in the first half of 2022 when compared to the same period last year with over 94% drop in collective proceeds from the London Stock Exchange (LSE) and the Alternative Investment market (AIM). This comes as the result of a series of ongoing factors, including the conflict in Ukraine, inflation reaching 10.1% and the Bank of England’s base interest rate rise to 1.75%.

As UK companies steer away from public markets, private equity (PE) firms have turned their gaze towards the UK as low valuations have produced fertile ground for acquisitions at a “discounted” price. Business advisory, Trachet, says American investors are looking to capitalise on the weaker Sterling, making companies now nearly 20% cheaper to buy in the UK. Serving as testament to this, one of the world’s largest PE firms, Thoma Bravo, has just announced it is opening offices in London as it sets its targets on takeovers in the UK and Europe with talks of a potential takeover of cyber-security giant – Darktrace.

According to PitchBook, PE firms were sitting on $3.2 trillion of dry powder by Q2 of 2022, driving PE investors to target considerably large companies with an increase in take-privates of UK companies. The recent announcement of the Competition and Markets Authority (CMA) dropping their investigation of New York based PE firm, Clayton Dubilier and Rice, and their £7 billion acquisition of Morrison’s marks the largest PE backed take-private in recent British history.

Poor reactions for high-profile companies such as Deliveroo, which saw its share value drop over 40% after a month of being listed was referred to as “London’s worst IPO in history” last year, has caused further listings on the LSE to dramatically decrease.

According to business advisory, Trachet, the IPO market is yet to show any signs of improving and companies still have growth commitments which must be fulfilled – marking a shift for companies which will seek funding from PE vehicles and strengthen their position through M&As for the foreseeable future.

Claire Trachet, CEO and founder of business advisory, Trachet, comments on the prevalence of private equity vehicles:

“As global interest rates rise across the world’s central banks, PE firms will be taking on very expensive debts in the long term. However, financial vehicles like IPOs have lost their attractiveness following an amalgamation of UK listings that have underperformed expectations”

“We are quickly moving into an environment where funding from private equity vehicles is going to become more common than funding through classic banks. Simply because private equity houses are sitting on a pile of dry powder and need to get the cash out in an environment of high inflation”