The UK's so-called "Winter of Discontent" in 1978-79 is a period that lives in infamy for Britons. It was a time of ongoing fuel shortages and bouts of panic buying as a series of strikes gripped the country. At the time, some accused Prime Minister James Callaghan of being blind to the calamity. The Sun newspaper headline that famously lampooned his denial read, "Crisis? What crisis?"

Déjà vu, anyone? While strikes are no longer a factor, supply-chain snags certainly are. The gas station queues are back; so are the empty store shelves. And like Callaghan before him, today's ever-upbeat Prime Minister Boris Johnson fails to share the nation's collective sense of foreboding.

At least this time, however, the PM isn't alone in his optimism. Private equity dealmaking in the UK has thrived amid this adversity, as a surge in buyouts marks a turning point for the asset class and its role in the British economy. For many investors, the question once again is: "What crisis?"

The UK isn't the only nation with economic woes; however, its recovery is expected to be slow. In 2020, world real GDP fell by 3.6%, as the pandemic upended trade, investment flows and unemployment globally. While the revival has begun—in Q2 2021, the UK's GDP rose 5.5%—the country's economy is still 3.3% smaller than what it was before the pandemic, putting its recovery behind other G-7 economies, including France, Canada, Japan and the US.

Events of the past few weeks in the UK underscore a rocky road ahead. The country is struggling from a crippling shortage of around 100,000 truck drivers. This is a result of both pandemic disruptions and a scarcity of foreign labor, caused by Brexit immigration restrictions. Dairy farmers have been forced to pour out undelivered milk, and fuel deliveries are being delayed—a problem made worse by panic buying.

But the rate of PE deals in the UK couldn't tell a more different story.

According to PitchBook's latest UK & Ireland Private Capital Breakdown, the PE market since the pandemic began has been on a bull run that has continued into 2021, with £57.9 billion (about $78.9 billion) transacted across an estimated 804 deals in the first three months of the year.

Take-private deals in particular stand out. Private equity firms with a surfeit of dry powder are targeting UK-listed companies that remain relatively undervalued. As of Sept. 30, PE investors had completed six public-to-private deals worth €12.1 billion (about $14 billion) in total. Not only has 2021 exceeded 2020's full-year amount, but it also isn't far behind the 2019 peak of €13.6 billion.

Last week, PE firm Clayton, Dubilier & Rice emerged as the winner of a four-month bidding war against a Fortress Investment Group-led consortium to take the UK supermarket chain Morrisons private for £7.1 billion. Once it closes, it will be the biggest buyout of the year, driving a new record for total PE take-private deal value. Other transactions are also in the pipeline, including TDR Capital and I Squared Capital's proposed acquisition of power generation equipment company Aggreko and Blackstone's buyout of property group St. Modwen.

This surge has not come without a backlash. The rise in deal activity has frequently been attacked as a raid on corporate Britain, with so-called private equity "vultures" picking the bones of UK public companies struggling during a pandemic. Some politicians have called on the government to intervene on certain deals, specifically CD&R's acquisition of Morrisons. Many fear (not unreasonably) that PE ownership inevitably will leave UK companies loaded with debt and stripped of their assets before eventually being sold off piecemeal, with little regard for employees.

Not everyone sees it this way, of course. Last month, UK finance minister Rishi Sunak framed the PE binge on British business as "good news" for the economy.

Speaking at a tech conference on the same day CD&R cemented its lead in the battle for Morrisons, Sunak said: "I would view it as a sign of confidence in the UK." Although that may be a predictable response from a government minister eager to paint the UK's current situation in a positive light, he wouldn't be entirely incorrect. 

The reality, as it often does, lies somewhere in the middle. The current surge in PE dealmaking is likely to subside as the UK economy recovers, but its impact—for better or worse—will last longer. Whether we can call the UK's current economic doldrums a new "Winter of Discontent" remains to be seen, but it is certainly a season of change. Private equity's newfound prominence signals a watershed moment for a country where publicly listed companies have long dominated the economy.

Featured image by Drew Sanders/PitchBook News

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