UK private equity activity cooled in the first half of 2023, according to new research from KPMG. The firm’s Private Equity Activity Tracker found that deal value fell by 25% to £22.5 billion in H1 2023, from £30.7 billion in H1 2022.
Rob Baxter, Head of Corporate Finance at KPMG UK, said: “Bolt-on deals are attractive as they are seen as a lower risk option for deploying capital, particularly in a volatile economy, and they are viewed as a tried-and-trusted strategy to support the growth of existing platform businesses. So investors are choosing to work smarter, rather than harder, putting their capital into industries and businesses they already know and understand, where they can leverage potential cost synergies to drive value.”
Will the M&A market return to form in 2023?
Rob Baxter concluded: “Looking ahead, there are certainly reasons to be optimistic about the outlook for the UK’s M&A market. Green shoots are already starting to appear from an economic perspective, with a slow down in inflation, and the hope is that this will create a more benign interest rate environment. With a general election due to happen in January 2025, if not before, the issue of potential changes to Capital Gains Tax returns to the fore. This is likely to be front of mind for business owners who are concerned about a potential tax rate rise, and as a result it could lead to a flurry of businesses coming to market, as owners look to de-risk their personal portfolios and release some wealth.
“The number of private equity exits in the first half of the year remained low yet again, but pressure is building on this front, so it’s just a matter of time until we see an eventual uptick in exits. At the same time, there’s an abundance of private equity dry powder which needs to be deployed into new investment activity sooner or later. Both factors could drive a significant increase in mid-market private equity activity given the right market conditions. Ultimately, the building blocks needed for dealmaking are already in place, and as greater economic, political and financial stability begins to return, it won’t be long before the M&A tap is turned back on.”
The number of deals also fell by 10% to 475 in H1 2023, from 527 in H1 2022.
The decline in activity was driven by a number of factors, including:
- Rising interest rates: Rising interest rates have made it more expensive for companies to borrow money, which has reduced the pool of potential buyers for assets.
- Economic uncertainty: The war in Ukraine and the ongoing COVID-19 pandemic have created economic uncertainty, which has made investors more cautious.
- Wariness of high valuations: Private equity valuations have reached record highs in recent years, which has made some investors wary of making new investments.
Despite the decline in activity, KPMG said that UK private equity remained a “resilient” sector.
The firm said that there was still strong demand for private equity investment, and that investors were looking for opportunities in sectors that were less sensitive to economic cycles, such as healthcare and technology.
KPMG also said that the UK remained a “attractive” destination for private equity investment.
The firm said that the UK had a strong track record of innovation and entrepreneurship, and that it offered a favorable regulatory environment for private equity investors.
Looking ahead: KPMG said that it expected UK private equity activity to pick up in the second half of 2023. The firm said that investors were likely to be more active in sectors that were benefiting from the post-pandemic recovery, such as consumer discretionary and travel and leisure.KPMG also said that investors were likely to focus on deals that offered value for money.
The firm said that investors were looking for assets that were trading below their intrinsic value, and that they were willing to take on more risk in order to find these deals
Overall, KPMG said that it remained optimistic about the outlook for UK private equity.
