July 28, 2025

Bad headlines, good businesses? The UK Equity Market Offers High-Quality Opportunities at Attractive Valuations.

Despite a tough macro backdrop, we believe UK equities continue to offer one of the best combinations of quality and value globally. A recent research trip reinforced our conviction in this market’s depth, resilience, and opportunity set. This paper outlines six recurring patterns we observed – and why we believe the UK remains a fertile ground for active, bottom-up investors.

We have long held that the United Kingdom is the cheapest global market for the management quality, corporate governance, and minority investor protections available. As a result, we have generally held an overweight position in the UK, finding many businesses meeting our bottom-up stock selection criteria. Of course, the macro environment has often been unfavorable (think 2016 Brexit referendum, 2020-21 COVID lockdowns, 2022 energy price shock and “mini-budget”-induced gilt/sterling meltdown, 2024 National Insurance contribution hike, etc.), but we generally don’t get discount prices without bad headlines. The UK has certainly delivered on that front!

To be clear, the UK has some difficult issues to contend with:

Housing purchase affordability is poor, particularly in England where the median house price was 8.6x median household income in 2023.
Real household disposable income per head has grown less than 1% per year over the last two decades.
Keir Starmer’s Labour government (the first in power since 2010 – nearly as long a hiatus as Oasis took before reuniting!) is making efforts to put more money in people’s pockets, by, for example, hiking the National Living Wage for adults over 21 by 6.7% to £12.21 per hour from April this year. Unfortunately, this coincides with a significant rise in additional costs being borne by employers, due to things like the aforementioned hike to National Insurance contributions that support healthcare provision by the NHS, so the labor market may remain somewhat weak. Outside of COVID, seasonally-adjusted unemployment at 4.6% is the highest it’s been since early 2016.
Household electricity prices in London where, according to London.gov.uk roughly 9 million people or 13% of the UK’s population reside based on figures from the Office for National Statistics reside as of mid-2023) are also running as high as any capital city on the European continent, outside of Berlin.

Still, in our view there are plenty of reasons to be optimistic about the UK:

In the World Bank’s last set of Ease of Doing Business rankings, the country placed 8th in the world;
It is home to several of the world’s top universities, including Oxford, Cambridge, and Imperial College London;
Leveraging this intellectual capital, the country has birthed a high number of ‘unicorns’ (privately held start-ups valued north of $1B), particularly in areas such as fintech and AI;
Despite missing out on some high-profile stock market listings in recent years, such as Cambridge-headquartered Arm Holdings, London remains a top global financial center;
Unlike Germany, the country has pragmatically remained committed to nuclear power as part of its decarbonization plan, aiming to quadruple its generation capacity by 2050;
The UK has quickly secured some of the best terms of trade with the United States through its Economic Prosperity Deal, announced in June; and
Oasis is back!

To refresh our bench of UK portfolio candidates, we recently traveled to the country and visited 15 companies, only three of which are current holdings. We came away energized and feeling positive about a lot of the businesses we met.

Below are six themes and investment “patterns” that recurred over the course of the week, reflecting the breadth of the UK opportunity set as well as our stock filtering preferences:

1.High recurring revenue

Examples:

a pension advisory and administration business with ‘>90% repeat recurring revenue’;
an identity software player with ‘95% repeatable revenue’ (subscription + consumption-based);
a market intelligence business with 75-77% subscription revenue and renewal rates of 97-98% among clients spending over £100K; and
an administration platform for financial advisers that charges recurring fees based on funds under direction.

2.Buy and build strategy

Examples:

a serial acquirer of over two dozen scientific instrument companies that has delivered 20% revenue growth over 20 years and >20% annual returns to shareholders over the past decade;
a restructuring, forensics, and corporate finance/debt/financial advisory firm that has done 14 deals since its 2020 listing; and
an ID software and market intelligence businesses that did about 15 deals each in their formative years.

3.“Sitting ducks”

We met quite a few companies that seem like prime takeover candidates, either by a strategic or financial buyer.

Examples:

an ID software company that may need to sacrifice its very high margins to reignite growth, which could be more easily done in private;
a specialty chemical company that trades for less than half the EBITDA multiple of certain larger peers; and
an online auction facilitator that, at roughly 10x forward EBITDA estimates, is not getting credit for the powerful scale advantages it is building.

4. AIM to Main Board

Quite a few companies have announced that they are either moving or considering a move from the AIM market (for smaller growth companies) to the more globally investable Main Board of the London Stock Exchange. The smallest of these companies is hesitant on account of losing a meaningful subset of shareholders represented by funds that exclusively invest in AIM-listed companies in order to harvest inheritance tax benefits. Bigger small caps believe they can offset such losses through passive flows tied to inclusion in the FTSE 250 index.

5.Self-help / “New Sheriff in Town”

Examples:

a Defense supplier whose new management team are kaizen (Japanese term meaning “change for the better” or “continuous improvement”) fanatics and arranged for our team to walk their factory floor with a production manager, to experience the palpable changes here;
a chemical company whose new CFO compared the business to an ‘unruly teenager’ in need of some focus and transformation; and
a financial adviser platform and online auction facilitator, both of which have made significant C-suite upgrades to help drive technology investments intended to unlock a step-change in growth.

6.Severe multiple de-rating on a slowdown

In our view, these sharp de-ratings present an attractive entry point and that these are not structurally impaired businesses. We think current valuations reflect sentiment-driven dislocation rather than long-term deterioration, providing quality businesses at a significant discount.

Examples:

a scientific instruments player whose share price halved following an uncharacteristic earnings downgrade;
a market intelligence firm which fell short of its targeted rate of high single to double-digit organic sales growth, taking shares to a >40% discount to their typical earnings multiple; and
a restructuring and financial advisory business which has cautioned on delays to corporate decision-making in light of macro uncertainty, bringing shares down to their lowest valuation since flotation.

Summary

Overall, we came away with several near-term purchase candidates and plenty more for the worklist / watchlist. These companies, in our view, generally have solid business fundamentals, clean balance sheets, the ability to withstand adverse macro conditions, and opportunities to integrate operations, deploy capital into opportunistic M&A and/or share buybacks, or otherwise position themselves for brighter days ahead. And, critically, many of these businesses are available at valuations we just can’t find in other developed markets at what we believe to be comparable quality. This gives new meaning to the classic London Underground phrase, “Mind the gap!”

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Toby Shute

Portfolio Manager, Global Equity Team

Bad headlines, good businesses? The UK Equity Market Offers High-Quality Opportunities at Attractive Valuations.

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