UK private equity deal activity bounced back in the second half of 2020, although a profound slump in transactions in Q2 as lockdown gripped the M&A market meant that total annual deal volumes hit their lowest levels in more than seven years. 

Key findings – 2020 Mid-market PE activity in the UK

KPMG’s latest study of UK transactions involving private equity investors indicates that a total of 889 deals completed over the course of 2020, with a combined value of £87.2bn. This was the fewest number of private equity transactions seen in the UK since 2014, and a fall of 26% on the previous year.

Mid-market PE deals[1] were particularly impacted by the challenges brought about by the COVID-19 pandemic, with both volumes and values falling by a third on the previous year. In total, 452 mid-market transactions completed during the year, with a combined value of £28.5bn.

However, while total annual deal volumes were ultimately hampered by the cliff-fall seen in the second quarter, there was a clear bounce-back in activity in Q3 and Q4. Deals that had been put on hold sprung back to life, and PE investors, still sitting on substantial reserves of capital, mobilised once more, resulting in over two hundred transactions completing in each of the final two quarters.

Multiples remain resilient

The average M&A multiple increased from 8.5x earnings to 8.7x, while the average PE multiple fell from 11.0x earnings to 8.7x. Likewise, the PE Mid-Market saw multiples decline from 11.6x in 2019 to 10.7x in 2020 – still strong, albeit lower than that seen over the previous five years.

The fall-off in multiples in the mid-market is likely an indication of the different experiences amongst sectors and a ‘flight to quality’ on the part of PE investors. 

Mid-market PE Exits – cause for concern, or grounds for optimism?

Superficially at least, the diminishing exit volumes seen in the UK PE mid-market in 2019 continued in 2020, with exits falling from 148 in 2019 to 129 in 2020 - a 13% decrease - with aggregate values holding steady at around £10bn.

On closer analysis, however, the picture is somewhat more positive. Q1 2020 actually saw an increase in PE-backed exits, with 40 such transactions, up from 35 in Q4 2019. After a lockdown-driven slump in Q2 and Q3, exit volumes then rose dramatically in the final quarter, topping out at 45 transactions - the highest quarterly total since mid-2018.  Aggregate values in Q4 reached £5bn, the highest figure since Q1 2017.

Outlook for 2021 and beyond

Whilst we are currently not seeing any signs that the latest lockdown is quelling momentum, there remains some uncertainty, particularly around certain sectors negatively impacted by the pandemic.

The fundamentals that underpin the PE market remain strong. There are enormous amounts of dry powder available. Debt markets continue to be supportive in terms of both leverage and cost of financing. Business owners who have been waiting for a few years now for the perfect opportunity to bring in investment or sell, and who may be mindful of a potential increase to capital gains tax, are now keen to push the button. Such is the appetite from PE to invest that we’re now seeing them make pre-emptive offers for assets and hoping to do deals off-market, particularly in the mid-market where there is a high level of competition for assets.

Finally, we should also expect to see investors attracted to those sectors which have shown resilience and grown throughout the pandemic.

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