Exits by private equity (PE) funds from UK companies “bode well” for the defined contribution (DC) pensions market as the government looks to push its growth agenda.
According to MCAM Group, the London-based placement agent, the number of successful exits by PE funds from UK companies through M&A deals was up 48% in the last year from 120 to 177 in the year ending 1 November 2024.
Exits by PE funds have bounced back strongly following a down year in 2022/23 as high interest rates climbed to their highest level since the global financial crisis – subduing M&A and IPO activity.
According to Lars Bjoergerd, managing director of MCAM Group, the number of exits has increased as the availability and pricing of acquisition finance improved during the last year.
He added that this has “dramatically” improved the economics for both strategic buyers and other potential bidders for private equity-owned companies.
He said: “The M&A market has come back to life in the UK – greatly improving the options for PE funds looking to exit their investments. However, the UK IPO market is still in the green shoots stage of its recovery.”
Bjoergerd said distributions to investors are still an issue but the environment is now a lot healthier. He also predicts the UK IPO market is going to take “some time” to recover to its long-term average meaning that the route for PE exits is “far less dependable”.
He added that the slower pace of distributions which followed the rounds on interest rate rises meant that many institutional investors have been far more focused on the track record of buyouts, growth equity and venture capital funds in achieving exits.
“GPs that do not have an established track record of successful exits, and in particular those not focused on hot sectors such as AI, are going to get a lot more scrutiny from investors on their strategy for making distributions,” he explained.
Bjoergerd added that institutional investors, such as pension funds, need regular distributions from the PE funds that they invest in and closely monitor distributions to paid-in capital (DPI) levels.
He said: “Until the exit environment is back to full health LPs are going to be wary of investing in funds that have not been able to make distributions at the expected levels.”
Bjoergerd added that investors need reassurance. However, he said that the current rate-cutting cycle is now “well underway”, providing readier access to debt financing and on better terms. He predicts that this will likely also reignite the market for secondary buyouts.
Matthew Swynnerton, pensions partner at DLA Piper, said the exits potentially “bode well” for the UK DC pensions market, which often invests in PE.
He pointed out that both the current and previous UK governments stated they aimed to increase pension fund investment in UK private markets. With rising exits, investors, including pension funds, may see an increase in distributions and a decision to reinvest in PE or diversify.
He said: “Government efforts to boost investment in UK private markets by pension funds may depend on available returns, with potential interest rate cuts and market shifts influencing this.”
Since the size of DC funds could be a barrier to successfully entering the PE market, Synnerton said that the proposed reforms to the UK DC market, outlined in chancellor of the exchequer Rachel Reeves’ 2024 Mansion House speech, including the consolidation of DC schemes and the creation of mega-funds, could unlock new opportunities for pension funds to capitalize on PE opportunities while simultaneously boosting investment in UK markets.
He said: “If the UK PE market remains buoyant, these reforms, although several years from realisation (2030 at the earliest), could further stimulate investment in UK markets, aligning with broader government goals.”
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