David Kimberley
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Updated 17 Jun 2022
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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Amid all the volatility we’ve seen in markets so far in 2022, it has been easy to forget one of the major trends of the past couple of years – the huge number of listed companies being acquired in the UK by private equity firms.

The private equity market boomed last year, reaching a total of $1.21trn (£991.6bn) globally. But the UK equity market was particularly affected by the trend, with private equity acquisitions of London-listed firms totalling £61.8bn in 2021.

Given the huge amount of uncertainty in markets we’re seeing at the moment, it’s not surprising that this buying spree didn’t continue unabated into the new year. Nonetheless, there has still been some notable activity in the London market, with translation services giant RWS almost being acquired by Baring Private Equity Asia and HomeServe set to be taken over by Brookfield Asset Management in a deal worth £4.1bn. A weaker pound may also make companies more attractive to foreign buyers.

Picking individual companies that you think may be acquired is likely to be a waste of time. Not only is it very hard to predict who is going to be bought next, buying companies purely because they may be acquired isn’t a great long-term investment strategy.

Still, the appetite for acquisitions arguably shows that investors believe there is still plenty of opportunity to be found in the UK. We’ve noted here before that companies trading on the London Stock Exchange continue to trade at very low valuations relative to almost all their global peers.

As Duncan Lamont, Schroders’ head of strategic research, wrote in April, this is true of most industries, so it cannot be explained purely by the UK’s lack of high growth tech businesses.

There are a couple of ways to take this. A more cynical one would be to think that companies are trading at low valuations, not because they are bad businesses, but because they are stuck in a self-reinforcing loop, where the UK is seen as a bad place to invest, leading to less investment, which in turn leads more people to conclude the UK isn’t a good place to invest.

A more optimistic argument is that this is a temporary phenomenon and the UK has been unreasonably neglected by market participants. As a result there are plenty of good companies in the UK trading at attractive valuations. Investing thus becomes a more appealing option relative to other markets, like the US, where finding share price inefficiencies is trickier.

Invesco Perpetual UK Smaller Companies (IPU) has arguably proven itself in this regard, with eight of the companies in the trust’s portfolio acquired last year. There is no guarantee that this will continue, nor do the managers buy companies with the hope they’ll be taken over at a premium.

Instead it’s arguably a sign that the managers have a knack for picking businesses that are undervalued. Whether or not the private equity boom continues, it’s hard not to see that being a positive trait moving forward.

Past performance is not a reliable indicator of future results

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