UK mid-market private equity deal activity topped pre-pandemic levels during the first half of 2022, says KPMG
UK mid-market private equity activity in H1 2022 was above historic levels, despite a decline from record-breaking figures observed in 2021
UK mid-market private equity activity in H1 2022 was above historic levels
- UK mid-market private equity activity in H1 2022 was above historic levels, despite a decline from record-breaking figures observed in 2021
- Business Services and Technology, Media, and Telecom (TMT) sectors dominated, accounting for over 60 percent of mid-market deals
- Bolt-ons represented 62 percent of deals – the highest half-yearly proportion on record
UK mid-market private equity activity in the UK has exceeded historic levels of both deal volumes and values during the first half of 2022 (excluding the unusual peak in activity during 2021), compared to the same period in 2018 and 2019, according to new research collated by KPMG into UK private equity activity.
The study revealed both deal volumes and values declined in H1 2022 after the post-lockdown surge of 2021, down around 19 percent and 16 percent respectively on the same period last year. However, compared to 2019 the 391 deals completed was 44 percent higher than the same period in 2019, while the aggregate deal value of £22 billion was 26 percent higher than the £17.45 billion achieved in H1 2019.
Bolt-ons accounted for 62 percent of all mid-market deals – the highest half-yearly proportion on record – due to them being viewed as a low-risk strategy to support the growth of existing platform businesses. The aggregate value of bolt-ons in H1 2022 was £12.7 billion, also notably higher than the levels seen in both 2018 and 2019.
Jonathan Boyers, Head of KPMG’s UK Corporate Finance practice, said: “At first glance, the decline of both deal volumes and values in the first half of 2022 could be negatively perceived. Yet, the overall picture is a positive one. Putting the unexpected spike in activity during 2021 and in the final quarter of 2020 to one side, both mid-market deal volumes and values in the first half of 2022 exceeded those achieved before the pandemic occurred.
“Positive mid-market activity was driven considerably by fears of a probable Capital Gains Tax increase in early April, that caused dealmakers to push deals through before the anticipated change. We have also observed a growing number of business owners de-risk their personal asset portfolio as the UK slowly emerges from the pandemic and the general outlook improved.”
TMT and Business Services experienced sustained growth
In H1 2022, Business Services and TMT maintained their number one position in terms of mid-market deals, accounting for nearly two-thirds (60 percent) of private equity investments. The ongoing trend for hybrid working and digitally enabled services encouraged this trend.
Neil McManus, Head of Business Services M&A at KPMG in the UK explained why Business Services is viewed as such a resilient sector with ample investment opportunities: “There is plenty of potential for consolidation, particularly in certain sub-sectors like accountancy services or testing, inspection and compliance services. This is attractive from a private equity perspective as it provides an opportunity to deploy follow-on capital into existing platform investments that are already known and understood, a lower risk strategy in the current environment.”
Healthcare and Financial Services also performed strongly, with their proportion of deal volumes growing in H1 2022, with 10 percent and 11 percent respectively. In addition, Healthcare saw its proportion of aggregate deal value increase from 8.9 percent in H1 2021 to 11.8 percent in H1 2022.
Exits saw significant drop-off
Although there was a slight recovery in exit volumes in 2021, UK mid-market private equity exits saw a significant drop-off in H1 2022 – down to just 59 deals at a value of £3.2 billion. This was the lowest volume of exits for at least five years, 71.5 percent down on 2021 and 54.6 percent down on 2019.
A knock-on effect of this trend is that the proportion of investments versus exits has got worse. In 2020 there were 1.4 investments (excluding bolt-ons) for every exit, in 2021 it was 1.9x. In H1 2022, this imbalance climbed to 2.5, showing that the exit market has decelerated at a greater rate than the investment market, which itself has slowed.
Secondary Buyouts (SBOs) have stepped in as a primary exit route, with over 50 percent of aggregate value coming from SBOs, which accounted for 55 percent of the total volume of exits. This shift in the destination of exits is a result of the closure of the Capital Markets and a partial pullback by trade acquirers.
Business Services had the highest proportion of exits, at 41.4 percent by volume and 43.8 percent by value. In contrast, Consumer Goods and Services has fallen from 16.2 percent of exits by value to 7.3 percent, the largest decline across all sectors, reflecting the ongoing volatility in the sector.
Mid-market private equity deal multiples showed resilience
In terms of mid-market deal multiples, these dropped only marginally from 12x in 2021 to 11.4x in the first half of the year. It was a less rosy picture for the wider private equity market, where deal multiples contracted from a record level of 13.5x in 2021 to 10.9x in H1 2022. This echoes a similar reduction in the UK M&A market from 12.5x in 2021 to 10.8x in H1 2022.
Jonathan Boyers commented: “It’s promising to see a high volume of mid-market businesses and mid-market funds still chasing deals as this alludes to growth expectations. This serves to maintain a competitive tension which contributes to higher pricing. Mid-market valuations have performed slightly better due to the volume of deals in the TMT and Business Services sectors, which contributed almost two-thirds of deal activity in this market. Given these sectors’ resilience, I expect this trend to continue.”
Looking ahead to H2 2022 onwards
Providing his perspective on private equity trends to look out for, Jonathan Boyers added: “Existing factors such as high inflation, the Russia-Ukraine crisis and oil price rises will persist. These will only increase banks’ discretion and perpetuate the slowdown in the number of mid-market deals in H2 2022. On a brighter note, once oil prices level off and interest rate rises come through, the market should pick up again.
“TMT and Business Services will continue to dominate mid-market deals for the time being. However, once inflation is back under control, the more cyclical sectors, such as Consumer and Industrials, will see a fast-paced recovery and an uptick in private equity activity as a result.
“As ESG climbs up the corporate agenda, dealmakers will be on the lookout for deals that offer an ESG angle. Due to their shortage, the multiples of these deals are likely to skyrocket as dealmakers grapple with delivering on their ESG commitments.”
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