Private equity investment in Scotland’s mid-market businesses has experienced a decline in the first half of 2023 due to market volatility and tough trading conditions.
According to KPMG UK’s latest Mid-Market Private Equity report, only 21 deals amounting to £2.26 billion were completed in Scotland during the first six months of 2023, representing a 25% drop in volume compared to the same period in 2022.
The overall private equity market in the UK also saw a decrease in deal volume as 689 deals worth £70 billion were completed in H1 2023, compared to 909 deals completed in H1 2022.
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Graeme Williams, KPMG UK’s head of corporate finance M&A for Scotland, stated that the market’s confidence and deal volume were eroded by rising prices for goods and services, higher interest rates, and uncertainty about world events.
These challenges also affected the debt markets, resulting in a significant increase in debt prices, a more cautious approach from credit committees to new deals, and reduced leverage multiples.
Despite the drop in volumes, the level of activity seen in H1 2023 is still on par with pre-pandemic levels.
The private investment market had about 25% fewer deals, but deals are still being made, albeit taking longer, unless they involve really good assets.
There are reasons to feel positive about the UK’s M&A market, as signs of improvement are starting to emerge on the economic front, including a decrease in inflation.
This could lead to a more favourable environment for interest rates. Furthermore, with a general election expected in January 2025 or even earlier, the topic of potential changes to Capital Gains Tax becomes important again.
Business owners might be worried about a possible increase in tax rates, which could result in more businesses being put up for sale. Owners might want to reduce risk in their personal investments and access some of their wealth.
The number of private equity exits remained low in H1 2023, but there is growing pressure in this area. It’s only a matter of time until there’s an increase in exits.
Additionally, there’s a lot of available private equity funds that need to be invested in new opportunities sooner or later. Both factors could lead to a significant rise in mid-market private equity activity, given the right market conditions.
The foundation for making deals is already in place, and as greater economic, political, and financial stability returns, it won’t be too long before the M&A market becomes active again.
Frequently Asked Questions
What are the current challenges faced by the private equity market in the UK?
The private equity market in the UK is currently facing several challenges, including economic and geopolitical uncertainty, debt market liquidity, and pricing. These challenges have impacted investor confidence, leading to a cooling of mid-market private equity investment in H1 2023.
How has market volatility affected private equity activity in Scotland?
Market volatility and tough trading conditions have affected private equity activity in Scotland, leading to a drop in the volume of completed deals in H1 2023. KPMG’s latest Mid-Market Private Equity report found that 21 deals worth £2.26bn were completed in Scotland during the first six months of 2023, a decrease of 25% when compared to the same period in the previous year.
What is the current state of private equity fundraising in the UK?
Private equity fundraising in the UK remains strong, with several firms raising significant amounts of capital in recent years. However, the current economic and geopolitical uncertainty has led to some challenges in fundraising, particularly for smaller and newer firms.
How many private equity firms operate in the UK?
There are currently several hundred private equity firms operating in the UK, ranging from large, established firms to smaller, boutique firms. These firms invest in a wide range of sectors and industries, including technology, healthcare, and consumer goods.
What is the growth potential for private equity in the UK market?
The UK private equity market has significant growth potential, particularly in emerging sectors such as technology and healthcare. However, the current economic and geopolitical uncertainty, as well as the impact of market volatility, may impact this potential growth.
What factors impact private equity valuations in the UK?
Several factors impact private equity valuations in the UK, including market conditions, sector performance, and company financials. In addition, the level of debt financing available, as well as the level of competition among private equity firms, can also impact valuations.
