How private equity shapes the UK

Some stress tests to start: All 31 of the largest US banks passed the Federal Reserve’s yearly so-called stress tests, satisfying regulators that they could withstand a theoretical scenario in which unemployment rose to 10 per cent during a severe recession.

And a big loan book sale: Carlyle and KKR have won an auction for a $10bn student loan book from Discover Financial, clinching one of the largest loan portfolio sales of the year, said four people with knowledge of the matter.

Breaking down how private equity shapes the UK’s economy

Next week when British voters head to the polls, private equity will be on the ballot.

The Labour party, which has a commanding lead over the ruling Conservative party, is running in part on a plan to raise the taxes that buyout bosses pay on their lucrative profits known as carried interest.

While only about 2,550 people in the UK receive such profits, Labour expects to raise a modest £565mn a year by closing the “loophole”.

It’s not just about taxes: the tax proposal has led to a broader national debate over the industry’s impact on the country.

With the election set for July 4, the FT’s data team and DD’s Ivan Levingston analysed the data to stack up how PE has shaped the UK economy.

It’s unclear what Labour’s ultimate plans will be if the party’s elected. Buyout executives have sent mixed signals on the extent to which an increase in taxes might lead them and other wealthy individuals to leave the country.

At stake is an industry that ultimately employs millions of people in the country, and has emerged as the second-largest hub for private equity outside the US. And some of what DD found was surprising.

While PE has grown into a much larger industry today, the value of UK industry deals is only now closing in on the levels it hit before the global financial crisis in 2008.

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While a number of major funds are either based in the UK or have their largest offices here — such as CVC, Cinven, Permira and Apax — the top investors in the UK are foreigners led by Blackstone and KKR.

Ties between Blackstone and the UK are particularly close: The company’s founder Stephen Schwarzman was recently knighted while Prime Minister Rishi Sunak used to work at Goldman Sachs with Blackstone’s top Europe PE executive Lionel Assant.

It hasn’t all been fun and games. PE executives were hauled before parliament committees in 2007 and admitted to mistakes, while recent troubles facing the country’s largest water utility Thames Water — previously owned by Macquarie — have darkened the public’s attitude towards buyout deals.

After a lucrative past two decades, “going forward, it’s not clear at all that they can replicate that”, said Oxford professor Ludovic Phalippou.

What’s driving the M&A market’s tentative comeback

This year, mergers and acquisitions have been a tale of two markets.

Big deals are continuing to make a comeback. Megamergers, such as ConocoPhillips agreeing to buy Marathon Oil in a $22.5bn deal, have pushed up global deal volumes about 20 per cent compared to last year.

But in the lower to middle market, they’re continuing to drag, with total mergers hitting a four-year low.

Despite a bump, deal volumes are on track to stay below $1tn for the eighth quarter in a row, DD’s Maria Heeter and Ivan Levingston report.

“This year for M&A is much better than last year,” said Anu Aiyengar, global head of mergers and acquisitions at JPMorgan. “But that’s a low bar, because last year was a tough year.”

M&A bankers and advisers are starting to reap some of the rewards of the market rebound, with certain deals proving hugely profitable.

One great example: Professionals advising on Czech billionaire Daniel Křetínský’s takeover bid for the owner of Royal Mail are expected to net up to £146mn in fees. Bank of America, Barclays and BNP Paribas are set to share in that bounty.

Even with a slight boost — mainly driven by the US market — the recovery is fragile. The slight uptick comes after M&A activity slid to a decade low in 2023 as interest rates rose from the ultra-low levels that stoked a pandemic-era deals boom.

Plus, the market’s still replete with uncertainties, and there are serious divergences in opinion on what’s in store for the second half of the year. 

One senior European banker said: “There’s concerns about the consumer, there’s concerns about elections, rates haven’t come down as fast as people had hoped. All of that introduces more volatility.”

WPP rejects KKR’s bid for public relations firm FGS Global

Private equity’s newfound interest in the niche sector of public relations appears to be alive and well.

The latest approach: KKR’s going after communications firm FGS Global.

KKR’s bid to control the communications firm, majority owned by UK-listed advertising group WPP, was turned down by the board for being too low, DD’s Arash Massoudi and the FT’s Daniel Thomas report.

There’s been a string of these private equity-communications deals recently: Tulchan Communications was sold to Teneo, which is partly owned by CVC, while Powerscourt was sold to TPG-backed Morrow Sodali.

KKR is intimately familiar with the business, after taking a 30 per cent stake last year. At the time, the group was valued at about $1.4bn.

Although the private equity group’s recent offer was higher than its valuation from 2023, it was still dismissed for being too low, said people familiar with the talks.

FGS has gone through its fair share of transformation.

It’s the product of a three-way merger between communications and lobbying firms controlled by WPP: London-based Finsbury, Frankfurt-based Hering Schuppener and US Glover Park Group.

The London stock market isn’t working to WPP’s strengths. Its £8bn market valuation is worth less than its stable of operating businesses, which includes public relations firm Burson, and advertising businesses GroupM and Ogilvy.

For now, the potential takeover seems to be in limbo. KKR could return with a higher offer, said two people close to the talks, while another described the situation as a “price negotiation”.

Another person said WPP’s board didn’t consider FGS “for sale” — but of course, would have to weigh its fiduciary duty.

Even though nothing’s been agreed, there’s still a prominent cast of advisers involved: co-head of European private equity Philipp Freise is leading the investment for KKR, and Goldman Sachs is retained as the adviser for WPP’s transactions.

Then at FGS, Roland Rudd is co-chair and Alexander Geiser is its chief executive.

Before KKR’s offer, the plan was to float FGS sometime in the next two years. But now, another option is on the table. Will WPP sell the firm instead?

Job moves

• Thrive Capital’s founder Josh Kushner is set to join film studio A24’s board of directors after making an investment in the company. The deal values the company at $3.5bn.

• Deutsche Bank has appointed Martin Blanquart and Mathew Mathew as co-heads of Emea technology, media and telecommunication. Blanquart previously worked at Credit Suisse, while Mathew has been with the bank for more than a decade.

• HP has appointed Karen Parkhill as chief financial officer starting in August. She’s currently executive vice-president and CFO at Medtronic, and previously worked for JPMorgan.

• American Electric Power named former Berkshire Hathaway Energy veteran Bill Fehrman as its next chief executive.

Smart reads

Float risk In order to avoid a London listing bust, Shein needs to close the gap between how the group sells itself, and what some investors believe it will deliver, Lex writes.

Unflattering testimony In Bill Hwang’s trial, testimony has laid out a grisly retelling of how Archegos unravelled. It’s particularly unflattering for Wall Street, Bloomberg reveals.

Refinery blast In the lead-up to an explosion at a BP refinery in Ohio in 2022, the company played down worker concerns and safety alarms, the Wall Street Journal reports.

News round-up

Top US banks withstand annual ritual of Federal Reserve ‘stress tests’ (FT)

Rivian shares soar on Volkswagen plan to invest up to $5bn (FT)

Bosch weighs offer for appliance maker Whirlpool, sources say (Reuters)

Nomura hands British banker record $12mn pay award (FT)

SEC’s Gary Gensler on his agenda: ‘If the courts adjust, we adjust’ (FT)