In the past few years, mentions of the UK market have been quickly followed with the phrases “undervalued” and “unloved”. The public market has flocked to the US amid the success of the magnificent seven, leaving little to work with for UK stocks. But now, many of these companies seem to have found a new suitor in the world of private equity.
Despite relatively strong balance sheets for many UK companies, valuations have settled at the bottom of the barrel, where private equity has started to see opportunities.
Katen Patel, co-manager of the JPMorgan UK Small Cap Growth and Income trust, said valuations for UK small caps have reached such a level where a standard bid coming in is at a 30-40% premium to its valuation. Even at this rate he said, he would sometimes advise companies that the price is too low.
“We’re seeing bids for companies almost every couple of days across the UK market. That definitely reflects the valuations. We’ve been talking about the UK market being cheap for a number of years, but it’s just become cheaper and cheaper, particularly relative to the US,” Patel said.
“Company balance sheets are generally in pretty good shape and that’s reflected in lots of companies doing buybacks. So that means pretty attractive targets for either private equity or other industry players. And we’ve seen a significant spike in activity this this year.”
