This week the British pound went into a tailspin and the FTSE tanked after the UK government revealed plans last week for a raft of debt-funded tax cuts. The chaos is shaping up as a chance for investors to snap up cheap UK assets, but the broader economic fallout of the economic plan, which was unveiled by British finance minister Kwasi Kwarteng on Sept. 23, could have a sting in its tail for bargain hunters. 

The brief, hastily-compiled budget—which is being called a "mini-budget"—is the first for newly-appointed Prime Minister Liz Truss. It has been received with near-universal derision. At the time of writing, the pound has plummeted against the dollar and the Bank of England has intervened with a bond purchase program to prop up the economy and protect savings. Even the IMF has stepped in with a warning. 

It is hard to predict what the next few days and weeks will bring. Already, PE investors are expected to take advantage of a weaker pound and falling public market valuations, as they did after Brexit. But higher interest rates, difficulties accessing debt and an overall drop in confidence could temper those dealmaking prospects.

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For now at least, the UK government is sticking to its guns. During media rounds in the wake of the budget, Truss and Kwarteng have remained unrepentant and say they are convinced their policies—which overwhelmingly benefit the country's highest earners—will spur growth. Some have likened it to "trickle down" economics, made famous by US President Ronald Reagan and his UK counterpart Margaret Thatcher (a political hero of Truss), four decades ago. 

The unpopular plan adds to any already volatile mix of economic headwinds that have driven down the pound and the values of UK assets over a number of years. It is fair to say that Britain's current economic problems started with the Brexit vote and were further compounded by the pandemic and the war in Ukraine. 

There are clearly aspects of the mini-budget that are intended as incentives for investors. Among them are the canceled corporate tax rate hike, expanded tax relief for early-stage vehicles such as Venture Capital Trusts, tax incentives for tech investment and reforms that will allow more pension funds to invest in alternative assets, including private equity. 

Arguably, there are unintended benefits for PE investors too. With the pound now just hovering above parity with the dollar, foreign investors will be eyeing cheaper UK assets. This was already the case in the wake of Brexit. The total value of PE-backed UK take-privates last year exceeded €27 billion, a record, and the selloff is likely to continue. Already, there are signs this is happening. 

Only this week, we saw UK-listed waste management company Biffa accept a reduced £1.3 billion offer from US-based Energy Capital Partners. A recent survey from Bloomberg named a number of other plump UK-listed companies that could become take-private targets. Among them are telecommunications group BT,  gaming giant Entain and Darktrace, the software company recently targeted by Thoma Bravo—all of which have seen their share price fall significantly in the past month.  

Getting financing for these deals, however, may be a challenge. Take-privates are typically underpinned by leveraged finance, and borrowing costs are rising. While a falling pound might drive down the price of British assets, when combined with soaring interest rates, it will exacerbate the existing borrowing costs for UK companies. 

Even before the UK's seismic budget announcement, some deals struck in last year's take-private binge already have shown signs of indigestion as the era of cheap money and low, or even negative, interest rates has come to an end. This includes the biggest deal of 2021: Clayton, Dubilier & Rice's £10 billion takeover of supermarket chain Morrisons, which has, according to the Financial Times, left underwriters Goldman Sachs struggling to shift some £5 billion worth of debt. 

The turmoil unleashed by Kwarteng's buccaneering fiscal policies is not only going to affect dealmaking, but fundraising could also be impacted.  Already the collapse of government bonds, which are being propped up by the Bank of England, have threatened to bankrupt pension funds in the country. Meanwhile, there are reports of pension funds and insurers from Europe and elsewhere being put off from investing in UK-focused PE funds because of the market turmoil.  

One pledge contained in the economic plan has been that it will make it easier for pension funds to invest in private equity. However, these policies are meaningless if the broader economic plan they comprise threatens to deter investors from investing in the asset class altogether. 

Featured image of Kwasi Kwarteng by Carl Court/Getty Images

This article originally appeared on PitchBook News