Weekly Briefing: UK encourages VC investment, China cuts interest rates modestly & EY rejects latest PE deal

This week, we explore several recently-published reports surrounding the UK’s economy and alternative investment industry, global impact investing trends, and venture capital in the Middle East. 

In addition, we discuss the current economic situation within China, the circumstances EY is facing at present, and the trajectory of the world’s largest national real estate market.

UK economy

PitchBook: UK Market Snapshot

• The latest UK Market Snapshot conducted by PitchBook highlights trends in regional public and private markets. The report found that – despite high inflation and interest rates – the UK economy avoided a recession in Q2 2023 as GDP levelled out. 
• Private equity (PE) fundraising has proven strong (boosted by a number of mega-fund closes) and dealmaking increased between Q1 and Q2.
• Venture capital (VC) deal activity was also up in Q2, and the Government has further bolstered this sector with the new Mansion House Reforms announced in July.
• The Chancellor’s Mansion House speech detailed plans to direct £50bn from pension funds to UK-based startups by 2030.

Global economy

China surprises with modest rate cut amid growing yuan risks

• China decided to reduce its one-year benchmark lending rate by 10 basis points and leave the five-year rate unchanged, surprising analysts who had expected cuts of 15 basis points in both.
• The news resulted in Chinese blue chips falling to a nine-month low and kept pressure on the yuan even as the People's Bank of China (PBOC) tried to support it with another firm fixing. 
• Analysts estimate Chinese banks sold at least $2bn offshore last week on behalf of the PBOC, but only managed a temporary pause in the yuan's decline.
• "China limited the size and scope of rate cuts because they are concerned about downward pressure on the yuan. Chinese authorities care about currency market stability," said Masayuki Kichikawa, Chief Macro Strategist at Sumitomo Mitsui DS Asset Management.
• The recovery in the world's second-largest economy has begun to stand still due to a worsening property slump, weak consumer spending, and tumbling credit growth, adding to the case for authorities to release more economic policy stimulus.

Impact investing

Exploring Schroders' Social Impact Trust Report 2023

• Impact investments are made to generate specific, measurable, and positive social or environmental impact, together with a financial return. 
• They can offer valuable diversification benefits and the opportunity to generate competitive risk-adjusted returns with low correlation to traditional quoted markets and relatively low levels of volatility.
• As reported in the Schroders BSC Social Impact Trust 2023 Report, the UK is confronting entrenched social issues that require targeted investment at scale:
  • £65bn is needed to insulate UK homes by 2035
  • £16.9bn is required annually to tackle the housing crisis
  • £7.7bn is required annually to meet the growing demand for care
• Impact investing is increasingly recognised as being able to deliver attractive financial rewards for investors, while simultaneously making a real, positive, measurable impact and contributing to the solutions to some of our most pressing social challenges. 
• As a result, social impact investment is growing rapidly, with the Global Impact Investing Network (GIIN) estimating the size of worldwide impact investing AUM to be $1.164tn (citing data from October 2022).

Venture capital

Middle East VC falling to levels last seen in 2018

• Venture capital (VC) dealmaking in the Middle East is likely to fall back to pre-pandemic levels this year since activity has dropped significantly in the region over recent months.
• So far in 2023, $3.2bn has been invested across 580 deals in the region, with Q2 recording the lowest quarterly deal count since Q3 2018.
• This compares with last year's figures of 1,414 rounds worth a total of $14.5bn.
• Despite these latest figures, increasing urbanisation and strong support from sovereign wealth funds have led to a sharp increase in Middle Eastern VC dealmaking over recent years.
• Israel remains, by far, the region's largest VC hub, accounting for nearly half of all 2023 rounds and 65.6% of value. 
• However, some of the smaller ecosystems – including Bahrain and Qatar – have seen a rise in activity and have both already surpassed 2022's full-year deal count.

Private equity

EY rejects US buyout group’s plan to take stake in consulting arm

• EY has rejected a proposal from US private equity group TPG to break up the Big Four firm and take a stake in its consulting business.
• TPG wrote to EY in late July outlining its plan for a debt-and-equity deal to separate its consulting arm from the audit business. 
• The pitch came just months after the collapse of EY’s own attempt to spin off the consulting business and seek a $100bn enterprise value in a stock market listing. 
• A break-up of the firm would represent the biggest overhaul in the accounting profession since the collapse of the US energy company Enron, which put its auditor Arthur Andersen out of business and led other big firms to split off their advisory arms two decades ago. 
• Proponents of EY’s own previous plan to spin off the consulting arm (known as Project Everest) argued it would allow both sides of EY to grow faster, freed from conflict-of-interest rules put in place after Enron that prevent firms from selling consulting services to their audit clients. 
• Ultimately, TPG’s proposal attempted to sidestep some of the points that contributed to Everest’s failure. With this proposal being rejected, the future of EY seems uncertain.

Property

US: Real estate outlook

• As the world’s largest economy, the US accounts for two-thirds of global real estate AUM.
• Although last year’s deal activity declined from 2021, 2022 still proved to be a positive year. 
• The aggregate value of US real estate deals was $184.9bn from 4,844 deals, down from $265.7bn across 6,253 in 2021.
• Notably, office deal activity has experienced a major decline amidst lower demand and rising interest rates, where aggregate deal value fell to $30.4bn in 2022, a 67% decrease from $91.9bn in 2018.
• Retail deals have rebounded after falling out of favour during the pandemic, with aggregate value reaching $13.9bn in 2022, more than doubling from $6.4bn in 2020.
• Many general partners still believe the US real estate market is attractive, as evidenced by the consistent rise in active fund managers over the past five years. As of May 2023, the number grew to nearly 1,400 (an increase of roughly 5% each year since 2020).

A final note

Amidst the shifts in the global economy and investment landscapes, the UK's emphasis on venture capital and impact investing persists. The long-term view of the Government regarding encouraging innovation and the growth of startups and scaleups provides a key source of optimism, not only for the UK economy but for the wider industries and communities poised to benefit from these initiatives.