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UK Private Equity investment falls – but mid-market remains resilient

UK Private Equity investment falls

Jonathan Boyers, head of M&A at KPMG in the UK, comments on UK Private Equity investment falls but mid-market remains resilient.


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Private equity investment in the UK declined significantly in the first quarter of 2019, as a cocktail of factors – from ongoing Brexit uncertainty, rising prices, a scarcity of quality assets coming to market and increasing concerns about global trade policies – tempered activity in the M&A market, according to new analysis from KPMG.

KPMG’s study of UK transactions involving private equity investors over Q1 2019 indicates that both deal volumes and values fell by a third (34%) year-on-year, with 175 deals completing between January and March, with a combined value of £11.49bn. This compares to the 266 deals totaling £17.36bn which completed in Q1 2018.

However, there was a bright spot to be seen in the UK’s middle market, where investment appetite remained high. While the number of deals in the middle market did fall year-on-year, the amount of capital invested remained broadly flat – with £9.44bn invested across 93 deals in Q1 2019, compared to 130 deals totaling £9.65bn over the same period last year.

Jonathan Boyers, head of M&A at KPMG in the UK, believes this is indicative of fierce competition for a smaller number of assets amongst buyers in the middle market, leading to a strengthening of pricing.

He said: “While it remains the case that there is a lot of dry powder in the market, it comes as no surprise that across the board, private equity deal volumes fell in the first quarter. As executives returned to work at the turn of the year and the original March 29 Brexit deadline loomed large, there was a palpable sense of caution kicking in and some processes being put on hold.

“However, we certainly didn’t see confidence disappear – particularly in the middle market. While Private Equity firms are perhaps being more considered in how and where they invest, they are still willing to pay big multiples for those businesses they see as high-value and resilient. Their approach has been, bid hard or don’t bid at all.”

KPMG’s analysis also suggests that with a scarcity of high-quality new deals coming to market and with substantial dry powder available at their fingertips, UK private equity firms are putting greater emphasis on their existing portfolio companies, encouraging them to become more acquisitive and growth-focussed.

In particular, bolt-on investments remain a strong driver of middle market activity, accounting for more than half of all transactions seen over the past 12 months. The focus of these bolt-on investments has varied from geographic or product expansion to enhanced market penetration or customer acquisition.

Additionally, PE firms are showing an increasing willingness to make minority stake investments. In 2018, PE firms conducted 87 deals that involved minority stakes, up from 80 in 2017. Twenty such investments took place in Q1 2019, accounting for more than 20% of all middle market PE deals during the quarter.

Jonathan Boyers commented: “While most PE firms would prefer to have overall control, a scarcity of deals has led some to relax their preferred outcomes and accept the need to make minority investments in order to deploy capital effectively.”

Other key findings:

· London’s middle market corporate base has seen a dramatic fall in the volume and value of private equity investment, with volumes halving and values dropping by 42% year-on-year. However, activity across most other UK regions remained robust, with volumes and values particularly resilient in the North West and across the South of England.

Jonathan Boyers, commented: “The fall-off in transactions involving London’s mid-sized companies is really striking, given deal activity across other parts of the UK has held up well. There may be sectoral factors at play here - for example, ongoing Brexit uncertainty dampening appetite to do deals within London’s financial services base.”

· There remains healthy interest in UK corporates from overseas private equity investors – notably those from the United States and Europe – thanks in no small part to favourable exchange rates. However, anecdotal evidence from KPMG’s M&A team indicates a number of transactions involving European investors were put on hold during Q1 2019, as uncertainty around Brexit intensified.

· Burgeoning demand for technology capabilities continues to be a key driver of activity, with PE interest in areas such as fintech, healthtech, proptech, and others growing very rapidly.

Future outlook

Looking to the months ahead, Jonathan Boyers believes that while volumes may continue to soften whilse economic and geo-political uncertainty abounds, private equity investors will still be keen to put their war chests to work for the right opportunities.

He said: “With the Brexit can kicked further down the road, there’s a likelihood that vendors who have retrenched into ‘wait and see’ mode, will remain in this holding pattern for the next six months at least, or perhaps even until the end of the year. Of course, if and when some sort of agreement or resolution is reached, then there may well be a spike in transactional activity due to pent-up demand.

“That said, the outcome of the local government elections, and even the European elections at the end of May could focus vendors’ minds on the possibility of an earlier-than-anticipated change in administration, and with it, a potential change to the UK tax regime. This may persuade some vendors to bring forward their exit plans, even if Brexit remains at that point unresolved.

“In the meantime, private equity teams will remain hungry to invest in quality businesses that have a compelling growth story, especially those backed by strong management teams and which have the focus and confidence to overcome wider market uncertainty. And they will be prepared to pay significant multiplies in doing so.”

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For more information, please contact:

Katy Broomhead, Senior PR Manager

Tel: 0161 246 4623 / 07824 537963


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KPMG Press Office: +44 (0)207 694 877


About KPMG in the UK

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