Category Archives: Investment

What does the ongoing conflict in Ukraine mean for private equity investment in UK defence?

GK Senior Adviser Hugo Tuckett analyses the historical challenges for private equity investment into the defence sector, and takes a look at investment landscape in the years ahead. 

Defence has historically been a challenging area for private equity. The nature of contracts, cash flow models and high barriers to entry have often been cited as reasons for a lack of investment. This is alongside the perception that the industry is dominated by a relatively closed shop of actors.

However, has the Russian invasion of Ukraine changed the outlook for private equity in this space? Does an on-going war in the Europe open the door to investment in technologies with an offensive application?

ESG considerations have certainly softened. While private equity houses have traditionally steered away from investing in defence due to ethical considerations, public attitudes in the UK indicate a continued desire to provide military support to Ukraine. YouGov polling, conducted in February 2023 on the one-year anniversary of the Russian invasion, found that 65% of Britons supported sending additional weaponry and supplies to the country. There was also more support (45%) than opposition (25%) for cyber-attacks against Russian military capabilities.

Furthermore, the Government’s continued desire to financially back UK defence points to a healthy procurement environment in the years ahead. The Defence Secretary’s very public lobbying efforts to secure additional funding on top of the multi-year settlement agreed in 2020 have certainly been fruitful. At the recent Budget, the Chancellor, Jeremy Hunt, announced that the Government will commit an extra £11bn to the defence budget over the next five years and confirmed the decision to increase investment by £5bn over the next two.

Where, therefore, does private equity most stand to gain in the industry? KPMG analysis from 2021 highlights two possible areas private equity houses might look to explore. Firstly, supply chain consolidation. Liquidity issues amongst the supply base lends itself to lower-tier suppliers joining together to create economies of scale and gain access to more capital. Secondly, in innovation. For growth-orientated investors, cutting-edge assets that become available to the market via divestments from parent companies presents an opportunity for private equity houses to bring their expertise to assets that could go onto become extremely successful businesses.

While, of course, some parts of the defence industry remain outside the scope of private equity, shifting public attitudes to offensive military technology and growing Government financial backing certainly point to a welcoming investment landscape in the years ahead.

GK consultants are on hand to offer investment professionals our expertise helping to assess the UK’s political and regulatory outlook. Please get in touch at hugo@gkstrategy.com for more information.

GK Point of View: The Circular Economy and its investment potential

With an increasing number of deals being conducted in this space, GK consultant Milo Boyd takes a look at the potential of the circular economy for investors.

The circular economy – a system of trade which aims to increase the efficiency of resource use and reduce environmental impact, while developing the wellbeing of individuals – is increasingly being looked upon as an area that warrants attention from investors, and it seems that the concept is here to stay. A 2021 report published by BDO showed that the concept has been attracting a growing amount of investments – more than £1.5bn of capital has been directed into the circular economy since 2018. Of this funding, 33% of the deals have been conducted in manufacturing and industrial sectors and a further 33% has been directed to the food and drink sector, giving an indication of the breadth of opportunities available for investors. The upward trend in investment would indicate that these opportunities are only going to become more numerous as the UK continues to march towards a more sustainable future, and increasing numbers of organisations place ESG at the front and centre of their business operations.

Fundamental to this shift is the growing understanding of the economic returns that the concept of a circular economy can achieve across a variety of industries, notwithstanding the more obvious environmental benefits. For example, 2021 research from the Ellen MacArthur Foundation and Material Economics found that an adoption of circular economy principles into a system that addresses material use, shifting the focus to retaining and reusing resources and reforming our food system, can help to tackle 45% of Co2 equivalent emissions around the world, and found that profitability of investments can be significantly increased compared with non-circular investments.

Finance has rightly begun to seize on these findings, and this is reflected in the overall trajectory of investment into the concept, as investors strike away from the ‘take-make-dispose’ and instead increasingly seek ‘circularity’ in investment decisions. The optimisation of the UK’s resources can be both economically stimulating and encourage the scale up of markets that support the UK’s net zero ambitions, whilst simultaneously producing high – and crucially less risky – returns for investors.

It is important that the Government provides the right environment to encourage these investments to continue. The installation of a new government brings the prospect of a political and regulatory reset, and with it a new direction of travel for policy. A particular point of focus is what approach new the Prime Minister will take. Liz Truss, a self-confessed fiscal Conservative who is keen to hit the ground running, has vowed to bring about the biggest change to the UK’s economic policy for decades. It remains to be seen how Liz Truss will approach environmental policy, aside from conflicting statements to boost the green economy whilst simultaneously supporting fracking.

The circular economy is an important feature of the Government’s environmental strategy, as has been made clear in the 25 Year Environment Plan published in 2018, and the more recently published Net Zero Strategy. But there has been scant indication of how the new Prime Minister intends to build on these strategies and how she hopes to maximise resource productivity, reduce waste of resources, and to encourage an acceleration in the circular economy’s development. This is where the financial sector needs to proactively respond and not shirk its responsibility – finance can and should be a key lever in maximising the circular economy’s potential. It should be in the sector’s immediate priorities to establish a working relationship with the Government to achieve the environmental and financial benefits that can set the UK on a path towards economic growth and environmental sustainability. This will be of vital importance if the Government and the UK’s finance sector are committed to maintaining the UK’s status as a global leader for finance and climate action.

GK Strategy are experts in helping organisations understand the changing political landscape, and strongly recommend that business leaders quickly meet with government to discuss their priorities. GK is well placed to support finance leaders looking to connect with relevant stakeholders, get in touch with milo@gkstrategy.com for more information.

GK Insight – Dr Iain Wilton on the future for financial services

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GK’s Head of Research, Dr Iain Wilton, reflects on the future of Britain’s financial services in the wake of the Queen’s Speech. 

Many aspects of the Queen’s Speech have received a lot of attention, from the absence of the Queen herself to the inclusion of so many housing-related bills – less than a week, in fact, after housing issues contributed to the Conservatives’ poor local election results, especially in London.

Surprisingly, however, relatively little attention has been paid to legislation that will fundamentally affect one of the UK’s most significant, successful but sometimes controversial sectors – its world-renowned financial services industry.

Together with associated professional service businesses, it employs more than 2.3 million people around the UK and contributes £193 billion to the economy – including £75 billion in taxes – yet some fundamental changes to its operation currently risk going ‘under the radar’.

Somewhat overshadowed by the announcement, in the Queen’s Speech, of 37 other pieces of legislation, the Financial Services and Markets Bill will cover everything from cash access to cryptocurrencies and scam prevention to the latest financial technology (fintech). Above all, the Government plans to introduce a new regulatory regime which will diverge from the EU model, encourage greater investment (especially in infrastructure) and, in the process, provide some of the ‘Brexit dividend’ that ministers are desperate to deliver before the next general election.

It will be a far-reaching piece of legislation. Moreover, it was accompanied in the Queen’s Speech by the dry-sounding but highly significant Draft Audit Reform Bill, which recognises that some high-profile company collapses (e.g. Carillion) have shaken people’s faith in the UK’s existing audit, governance and corporate reporting systems. As a result, competition will be increased, a new regulator will be created and, if the Bill is successful, trust should be rebuilt.

Both pieces of legislation will be subject to exhaustive scrutiny by MPs and peers, so each is certain to be amended and neither will be enacted any time soon.

In the meantime, however, significant changes are still afoot. In particular, the Financial Conduct Authority has recently published its new three-year strategy, which will result in the FCA becoming both a larger and a “more assertive” regulator which, in its words, wants to be “testing the limits of our own powers”. Indeed, after concluding that, at present, “firms are not consistently putting consumers first”, it will be publishing both an important “fair value” policy and an overarching “Consumer Duty” for financial services firms.

Due for introduction in late July, the ambitious new “Consumer Duty” will “set clearer and higher expectations for the standard of care firms give customers” and require them “to act in good faith, avoid foreseeable harm to their customers and support and empower them to make good financial decisions.”

At GK, we believe it represents a far-reaching tightening of the UK’s system of financial services regulation and, accordingly, it will be essential for firms to understand their new obligations and prove their compliance.

The Government’s legislative agenda, outlined in the Queen’s Speech, certainly dominated the headlines for much of the following week; its 38 bills will keep Parliament busy throughout the coming year; but some important policy changes are already imminent in the financial services sector – despite their low political profile – as the FCA prepares, even without new legislation, to flex its muscles as never before.