Navigating uncertain times

The economic rollercoaster continues. On 3 August 2023, the Bank of England raised interest rates for the 14th time in a row to 5.25%¹. Although expected to drop over next year, at the time of writing UK inflation stands at nearly 8%¹. Consumer sentiment is cautious. The UK political landscape is heavily influenced by the anticipated general election in 2024. All of which creates uncertainty. And uncertainty makes for a tougher investment environment.

How are private capital firms reacting? Suzi Gillespie, BVCA Head of Research, and Hind Jbala, BVCA Senior Research Analyst, take a look at the data. Firstly, holding periods are lengthening. Private equity and venture capital have always invested for the long term, backing businesses for around 5 years compared to 5.5 months in the public markets². Investments exited in 2022 were generally held for 3-6 months³ longer on average than exits in 2019.

Secondly, it is no surprise that the volume of divestments has fallen in 2022. Total exits for UK-led divestments and UK company divestments have decreased, with total exits amounting to £11.4bn for UK-led divestments and £6.6bn for UK company divestments⁴, down from £16.2bn and £7.7bn respectively, albeit from a high in 2021, underscoring the profound impact of geopolitical tensions, trade disputes, global market fluctuations, and the closure of IPO windows in most markets.

Given the uncertain economic climate, we anticipate that the quantity of exits in 2023 will remain low relative to previous years, with holding periods continuing to rise. Private capital investors will lean into their value creation strategies, helping the businesses which they have invested in to navigate these challenging times.

The reduction in exit activity has also presented challenges for Limited Partners (LP), who have become accustomed to receiving regular cash distributions from their private equity portfolios. This is leading to pressure on General Partner (GP) investment firms to identify ways to generate liquidity. Where a GP has backed strong businesses which need more time to navigate current challenges, and / or wishes to wait for a more optimal exit environment, a continuation fund may be a solution. Under a continuation fund, existing investments are sold to a new fund managed by the same firm. Investors will have the option to roll their investment, to fully exit or to partially exit.

Finally, we see private capital firms holding their nerve and continuing to invest. The pace of dealmaking is slower, and the amount of due diligence is higher, but investments made coming out of a downturn can be the ones which generate the best returns. With inflation expected to fall below 5% by Q4 2023⁵, the Bank of England predicting that the UK economy will now avoid a recession and interest rates expected to be at or close to their peak for this cycle, perhaps some of the fog of uncertainty will have cleared by the end of the year.

Suzi Gillespie
Head of Research, BVCA

Hind Jbala
Senior Research Analyst, BVCA

1. See “Bank Rate increased to 5.25% - August 2023”, Bank Rate increased to 5.25% - August 2023 | Bank of England
2. According to the analysis of the New York Stock Exchange data by Reuters as of June 2020, Buy, sell, repeat! No room for 'hold' in whipsawing markets | Reuters
3. Calculated by comparing initial investment date to exit date, for companies which have been fully exited in 2022 and 2019 from a fund’s portfolio by an investor, Private Capital - Rising to the challenges of turbulent times
4. See “BVCA Report On Investment Activity 2022”
5. See “Monetary Policy Report – May 2023”