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UK Private Equity activity at lowest levels for five years

UK Private Equity activity at lowest levels for 5 years

But sky-high multiples and high deal values in the UK mid-market suggest PE appetite to transact remains high.


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Private equity investment in the UK has fallen to its lowest level in more than five years, as heightened economic and geopolitical uncertainty continues to deter vendors from bringing assets to market, stymieing overall activity – according to new analysis from KPMG.

KPMG’s study of UK transactions involving private equity investors over H1 2019 indicates that both deal volumes and value have fallen to below levels last seen in 2014, with 384 deals completing between January and June 2019 with a combined value of £28.5bn. This compares to 483 deals totaling £31.5bn which completed during the first half of 2014.
The latest figures also represent a 35% fall in volumes and 40% decline in values when compared to the same period last year - H1 2018 saw 594 deals with a combined value of £47bn.

In the UK’s middle market, the number of deals involving private equity also fell sharply, from 273 in H1 2018 to 199 in the first six months of this year. However, the total deal value actually increased – with £18.4bn invested in H1 2019 compared with £17.69bn in H1– suggesting that for the right opportunities, investors in the middle market are still willing to deploy significant funds.

Jonathan Boyers, head of KPMG’s M&A practice, said: “The slowdown in transaction activity witnessed during the first half of the year certainly doesn’t appear to be a result of investors pulling down the shutters while they wait for the economic and geopolitical headwinds to blow over. Rather, it is being driven by a reticence amongst vendors to bring assets to market.

“The truth is that private equity remain incredibly hungry to invest, as evidenced by the fact that overall deal values, particularly in the UK’s middle market, remain strong, and deal multiples are at record highs. However, investors are currently eschewing those higher-risk transactions that they may have been willing to undertake a couple of years ago, when the market was more steady and they could price risk into both the deal and its structure. Instead, they are focusing on those higher quality opportunities that are perhaps considered safer bets in the short term.”

The significant amount of capital in the market, coupled with a dearth of quality assets for sale, has prompted private equity bidders to compete harder and harder in auctions over the first six months of the year. It has also prompted other changes in approach, with investors engaging due diligence providers early, together with accepting greater reliance on vendor due diligence; underwriting debt and also taking commercial views on critical deal issues – all with a view to being able to present a very deliverable, fully-funded bid which can be closed out in a very short timeframe, often a matter of days after being awarded exclusivity.

Jonathan Boyers explains: “Today’s highly competitive deal environment has put a much stronger spotlight on PE firms themselves. We are increasingly seeing funds do more to visibly differentiate their value propositions, while articulating to management teams how and why they are the best PE fund to work with. Those funds that demonstrably understand a management team’s goals and can articulate how they can contribute to these goals - for example, through relationships, resource, geographic reach or in-house strategic consultants - are far more likely to be successful in their bids than other investors with a less differentiated proposition.”

Tech remains the holy grail for PE investors

Over the course of 2018, private equity investment in the UK’s middle market was relatively diverse at a sector level, with TMT, financial services, and healthcare all attracting significant attention from PE funds. However, of these three sectors, only TMT saw increased investment in the first six months of 2019 – up 66% in value compared to the latter half of the previous year.

But while tech will undoubtedly remain a priority sector for investment over the years ahead, Jonathan Boyers doesn’t believe it will be all plain sailing in the quest for super returns. He said: “One of the challenges for mid-market private equity investors who are targeting the TMT sector is that many of these fast-growing high-potential businesses are younger, and have less of a track record than traditional businesses.

“While getting in early in the TMT sector is crucial to add value, a big question remains for many mid-market private equity funds on how exactly to do this. Some have launched specialist tech funds as a means of providing focus to better explore the opportunity. However many mid-market funds are shackled by the same investment structures as the larger funds, but simply with smaller cheque sizes.

“In an era where there is an increasing move towards disruption and disruptive business models, and where the average life of a business is ever shortening, I wonder whether now is the time for mainstream mid-market private equity funds to carve out some of their dry powder to attack the earlier stage market and hunt for unicorns. They need to develop the confidence to take views on as-yet unproven technologies or markets; back younger founders; and also be open-minded to higher valuations on investment rounds.”

With Brexit looming, what next for mid-market Private Equity?

Looking ahead, economic and geopolitical uncertainty are expected to affect PE investment throughout the third quarter and into Q4.

Jonathan Boyers concluded: “While a significant amount of pre-deal activity is expected to occur over the summer months, it is likely that most deal decisions – unless driven by other market factors – will be deferred until a Brexit outcome is known. However, once the Brexit conundrum is resolved, we may see a flurry of asset sales, investment activity and deal making as both sellers and buyers look to make up ground following this lengthy period of uncertainty. We are optimistic that this could lead to a bump-up in investment activity as we head into next year and our own pipeline is supportive of this.”

KPMG Corporate Finance’s practice has been involved in a number of high profile Private Equity deals over recent months, including Macquarie’s public to private of Premier Technical Services Group; Maven’s sale of GEV to Bridges Ventures; LDC’s investment in Texthelp; Bowmark’s sale of Care Fertility to Silverfleet; and Phoenix’s exit from Signum Technologies.

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For more information, please contact:

Katy Broomhead, Senior PR Manager
Tel: 0161 246 4623 / 07824 537963
Follow us on twitter: @kpmguk

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

About KPMG in the UK

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff. The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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