Why the UK investor summit shows the need for private capital
November 28, 2023
Ahead of the UK government’s Global Investment Summit, Managing Partner James Brocklebank wrote in Private Equity News about the UK’s investment landscape. With the country currently facing issues of under-investment, he argues that private capital and a supportive policy environment are key to reversing this trend.
The second Global Investment Summit took place on 27 November, with the government convening CEOs and business leaders from around the world to beat the drum of inward investment.
In the words of Kemi Badenoch, the Business and Trade Secretary, the event is aimed at making the UK, “the undisputed number one investment destination in Europe”, a goal that we share.
The event is timely. Earlier this year, the Institute for Public Policy Research calculated that UK business investment has lagged behind that of every other G7 nation in recent decades. The institute identified an investment gap of more than half a trillion pounds.
George Dibb, associate director at the institute, framed the problem in stark terms. “If the economy is the engine of a country, investment is its fuel. But the UK’s tank is running on empty.”
Clearly, we are facing a long-term, structural problem that requires complex solutions. However, I believe that one of the most important tools for ending this under-investment crisis lies close at hand – private capital.
Advent International has invested about £5.5bn of equity in more than 40 UK companies since 1990. And we are not the only ones. Overall, private capital invested an estimated £27.5bn into UK companies in 2022 alone, playing a vital role in driving national and regional growth. We do this because we see fantastic investment opportunities here in the UK.
Indeed, our largest investment team is based in London.
With this investment comes job creation. Private equity and venture capital now support 2.2m jobs in the UK, according to the BVCA. This is equivalent to 7% of employment – up from 1.9m in 2021.
An example from our portfolio is logistics business Evri, which has experienced dramatic growth, 10,000 jobs this year, as well as improving its customer service and paying pensions to its self-employed deliver couriers.
This growth is encouraging for many reasons. One is that employees of private equity-backed businesses are more productive. This was the conclusion of the academic authors of The Economic Effects of Private Equity Buyouts (July 8, 2021).
Using data from nearly 3,600 private equity buyouts in the US between 1980 and 2013, they found that labour productivity rises 8% at target companies over two years post buyout, relative to a control group.
Why are employees of private equity-backed businesses more productive? One explanation is that private equity is not subject to the quarterly earnings treadmill faced by public companies.
Private equity can take on investments that require upfront costs but yield long-term growth. The average holding period for a private capital stake in the UK is five-and-a-half years, compared to five months on the public markets.
The second explanation is the governance model: in private equity the owners sit around the table with management teams and make fast decisions, with strongly aligned incentives.
Then there is the ability of private capital to transform businesses, making them more efficient. This may be a case of adding sector experience and expertise that allows a business to accelerate its growth.
Marketing production company Tag is an example of a business that has achieved a successful transformation thanks to more than €100 million of our investment following our carve-out of the company from Deutsche Post DHL in 2017.
The business was sold earlier this year to Japanese advertising group Dentsu. These kinds of transformations, done right, can accelerate productivity.
They can also help address the crucial challenges of our time. I strongly agree with the BVCA’s stance that private capital has an essential role to play in the journey to net zero. In many cases, private equity-backed companies are majority owned, which makes the industry uniquely positioned to drive change, and the fiduciary responsibility of private equity managers means that ESG initiatives are rooted in value creation.
Private equity deal volumes have declined sharply this year. The reasons for this decline are various: rising interest rates, difficulties with price discovery, and an atmosphere of economic uncertainty.
It is important that the policy environment and competitive positioning of the UK remains supportive of private equity investment, because if the temporary decline turns into a long-term fall in such investment, the UK risks losing out on valuable “fuel” at a time when it is most needed.
Advent, at least, has no shortage of capital to invest. Last year, we completed our largest ever fundraising with $25bn (£21bn) for our flagship GPE X fund. Together with our second Advent Tech fund, we raised over $30bn in 12 months to invest globally. UK-led private capital funds have in total £145bn in committed funds to be invested in the next three to five years.
We strongly believe in the strength of Britain and British companies as a focus of investment. As I join delegates at the Global Investment Summit, I look forward to discussing the advantages that private capital can bring.
Private equity capital can not only boost investment: it can transform businesses, increase employment and boost productivity.