Neptune UK Mid Cap fund sees ‘pent up demand’ for M&A

The managers of the £583.8m Neptune UK Mid Cap fund are eyeing “pent up demand” for UK mid-cap companies as it starts to pick up following the Brexit referendum.

Already this year the UK has seen deals between Tesco and Booker, Aberdeen Asset Management and Standard Life Investors, and Wood Group planning to buy Amec Foster Wheeler, an oil company that is one of the Neptune fund’s holdings.

Assistant fund manager Holly Cassell says they are “excited and enthusiastic” that M&A has started to come through after a disappointing 2016, saying deals tend to happen in waves.

“The deals we’ve seen so far have been UK companies approaching other UK companies and we’d hope and expect to see overseas buyers to enter the market particularly as clarity around the Brexit process materialises.”

M&A data from 2016 shows that the mid-cap lagged the FTSE 100 and also its own long-term average.

“Given the weakness of sterling we’ve seen since the Brexit vote, we’d actually expect to see deal volumes in excess of the long-term average. We would suggest there’s some pent up demand in the system there.

Mid cap M&A lags in 2016

Source: Bloomberg/Neptune Research

“The early signs from 2017 show this to absolutely be the case. We’ve seen a few quite notable deals involving FTSE 250 companies.

“To maximise the prospects of owning an M&A target, historically speaking you want to be really focussed on mid and small cap companies. On average, around 9 per cent of the FTSE Small Cap index and 6 per cent of the FTSE 250 are acquired each year,” Cassell says.

The average market capitalisation of the fund holdings is £1bn.

“That’s quite different to many of our mid-cap peers to happen to be focussed on the larger companies of the FTSE 250.”

The fund, which is managed by Mark Martin, has returned 14.5 per cent over the last year compared to 18.7 per cent in the IA UK All Companies sector, FE data shows.

In the last three months the fund has returned 6.9 per cent compared to 5 per cent in the sector.

Martin says it is encouraging to see “sensible and valuation conscious” investors like 3G and Warren Buffett seeing value in Unilever.

Buffett joined with the private equity firm to pursue a $143bn takeover of Unilever in a bid that ultimately failed.

“We are investing in companies that are significantly cheaper than Unilever and if Warren Buffett is saying there’s value in Unilever then I am confident there will be all sorts of other people finding value that are that much smaller and much more attractively valued.”

He adds M&A is across sectors, unlike 2000 when it was focussed on tech firms and 2007, when mining companies were the focus.