As other investors bail on British markets, Marc Chowrimootoo is ready to dive in.
Hayfin Capital, where Chowrimootoo is a portfolio manager, is among private credit firms lining up to invest in U.K. companies. They hope valuations may trigger a wave of buyouts and open up lending opportunities for private credit.
“We are open in size for sterling exposure for high-quality businesses,” Chowrimootoo said.
The selloff that’s pushed the pound to a one-year low and driven valuations on publicly traded stocks to a 40% discount to global peers makes acquisitions harder to pull off in public markets.
Private lenders see it differently. They have a long history in the U.K. that allows them to look past the current turmoil.
“The weakening of the pound due to changing sentiment on the U.K. enhances the attractiveness of these companies to private equity buyers,” said Peter Glaser, head of credit at Macquarie Asset Management. “U.K. companies are good value relative to those in many other economies.”
Direct lenders are enduring a drought of deals as high rates delay new buyouts — their mainstay investment. They’ve long looked to the U.K. as a key market: It generated 34% of European dealflow captured by the Deloitte Private Debt Deal Tracker for more than a decade. The proportion slipped to 30% in the first half of 2024, the latest data available shows.
“The U.K. is seen as the first point of arrival for U.S. private credit managers in Europe,” said Alex Griffith, partner at law firm Proskauer Rose in London.
The tally of grim markers on the economy continued Jan. 17, adding to concerns over persistently high inflation and sluggish growth. U.K. retail sales posted a surprise fall around last month’s crucial Christmas period. That followed a report on Jan. 16 that showed the economy grew by a narrow margin that undershot forecasts.
Private credit lenders are hoping to snap up more deal opportunities from U.K. companies that may be abandoned by the public debt markets.
“When rates are high and cash flows are getting stretched, debt serviceability becomes the limiting factor,” said Dan Matthews, head of EMEA leveraged finance at SMBC. “In those environments, the flexibility of private credit becomes more compelling.”
That’s what happened in 2022 when the market for broadly syndicated loan markets shut in the aftermath of Russia’s invasion of Ukraine. Private credit firms stepped into the void left by retreating banks.
“Sponsors have long memories,” said Chowrimootoo at Hayfin. “They will recall from the last bout of volatility that private credit was the only relevant asset class that remained open.”