After a tumultuous political year, 2023 will see a more stable political environment in the UK. This will create opportunities for investors, but business should continue to hedge against geopolitical risk.
Below we set out some of the key opportunities and themes:
1. Companies and investors should start to engage with and prepare for Labour now. A Labour government from 2024 is highly likely (and the May local elections should provide further indications) but should not be viewed as a variation on New Labour. Expect a more interventionist and directive economic policy, especially on investment, the green economy, and the energy sector.
Labour will continue to flesh out its policy agenda, but policy detail will remain absent in some areas, and key questions remain over what Labour would do in office, especially on public sector and labour market reform, where they face pressure from within the party and from trades unions. This will affect valuations and the sell-side should show how they have factored this into their plans.
2. Competition scrutiny will continue to be high, especially on market consolidation. The new CEO of the CMA has been with the CMA for almost a decade. She is a continuity candidate in many ways but in 2022 indicated a more pro-business approach. And we expect further pressure on the CMA to be more business-friendly.
CMA priorities will include scrutiny of deals in digital markets and with relevance to the net zero transition and the cost of living – especially in areas of essential spending such as accommodation and healthcare.
3. National security clearance will remain an issue, with greater scrutiny of deals that may not appear to have obvious security implications. The mood is hardening on deal clearance of sensitive businesses to PE, especially given growing concerns about who PE might sell a business on to.
Investors can expect many other governments to intervene more and block more deals, justified on security and security of supply grounds rather than economic ones (and hence more difficult to argue against). Political considerations will trump economic argumentation.
4. There will be increased scrutiny of PE, especially on leverage, as more sectors come under spotlight and deals come up, e.g., in childcare and health & social care. A likely increase in take-private deals will also drive more scrutiny, which we have analysed elsewhere.
5. The Government will set out its wider economic policy in the Spring Budget on 15th March, having focused on fiscal stability and market reassurance in its economic and fiscal announcements since the fall-out from the mini-Budget. It will need to expand on how it aims to achieve the three economic pledges set out in the Prime Minister’s January speech: to halve inflation this year, grow the economy, and reduce the national debt.
6. Energy will continue to be a priority, but the policy focus will shift from short term support to important changes in how the market operates.
7. The labour market will become a much higher profile and more contestable policy space, from incentives and funding for training, to work visas, welfare reform, and the regulation of strikes and the gig economy. This will be one of the biggest areas of policy divergence between Labour and the Conservatives, given that trades unions’ influence on Labour is still strong– though Labour will push back on demands they believe are unrealistic and would be fiercely opposed by business.
8. Growing indebtedness will drive greater scrutiny of consumer finance, including the subscription economy, and other recurring revenue models, as consumers try to reduce regular outgoings.
9. Consolidation opportunities and special opportunities will increase in H2 as government support on energy and other cost of living pressures are reduced, further weakening many businesses. PE can benefit from this but will need to engage stakeholders carefully to avoid backlash.
10. Many B2G businesses will face reduced demand, as spending in real terms is reduced, but this will vary enormously between different departments, workstreams and public sector bodies. B2G firms will need to demonstrate ability to deliver efficiency, effectiveness and revenue gains to cash-strapped customers.
11. The Procurement Bill is likely to become law in the Spring, introducing more streamlined processes and opportunities for SMEs in the public sector. Social value and ESG will become much bigger factors in public and private sector procurement.
12. Brexit and trade issues will come to the fore. The immediate post-Brexit era of quick-and-easy trade deals is over. Domestic pushback (from farmers, in particular) and canny negotiating partners mean that the Sunak government’s approach will be more cautious. A deal with India and accession to the CPTPP (the free trade agreement between Canada and ten other countries in Asia-Pacific) remain possible, but not inevitable. The Government also needs to renegotiate several major EU-originating deals and reach agreement on revising the Northern Ireland Protocol.
UK trade and investment will be affected by the ongoing move away from a rules-based and economically liberal trade order, on security and ESG grounds, such as US attempts to onshore EV battery production, and the EU’s carbon-border adjustment mechanism and new foreign subsidy regulations. The UK needs to develop UK-specific trade tools to guard against spill-over damage, and agreements with trade partners to ensure that UK industry does not face undue discrimination.
13. Health and social care will provide more private sector opportunity, as we have analysed here, but the crucial question is to what extent the private sector will be engaged at local and national level on a sustainable long-term basis, and not just to deal with backlog issues. The Government is also pushing for care and diagnostics to be undertaken outside the bottleneck areas of NHS hospitals and GP surgeries, e.g., in pharmacies, workplaces and other private facilities.
The Shadow Health Secretary continues to support the use of the private sector within the NHS, but he will need the support of many powerful groupings within the NHS and the Labour party to secure significant, lasting change, which will be difficult to achieve (particularly given his vocal criticisms of the NHS and health unions.)
Flint’s Markets and Investor Advisory practice advises on political, policy, regulatory, and competition issues in European markets. We work with pension, private equity, infrastructure, and hedge funds, supporting them with investment strategy, political and policy risk management, and due diligence.
If you would like to discuss any of the issues raised in this note, please do get in touch.