Private equity investment in the UK has risen to its highest level in five years, as investors gained a renewed sense of confidence and vendors brought their assets to market – according to new analysis from KPMG.

KPMG’s latest study of UK transactions involving mid-market private equity investors showed a boost of activity in H1 2021, as 377 deals were completed with a combined value of £20.7 billion – levels which haven’t been seen since H1 2017. This is a significant increase when compared to the same period in 2020, which saw 260 deals with a combined value of £14.9 billion.

The picture for the UK’s private equity market overall was similar, with soaring deal volume and value levels which haven’t been seen since 2017. Between January and June 2021, 785 deals were completed with a combined value of £73.7 billion, representing a 61 percent increase in volumes and a 48 percent increase in value when compared to H1 2020. 

loading loading

Business Services and TMT steal the show for PE investors

While deal volumes increased for every sector measured in H1 2021, Business Services and TMT once again stole the show, accounting for the majority (62 percent) of private equity investments in the UK’s mid-market. Many businesses in these sectors have strong tech angles, so it’s no surprise that they attracted the lion’s share of investment and rising multiples. It’s a similar story with deal value by sector, as the value of TMT deals completed in the first half of 2021 almost doubled from £2.8 billion in 2020 to £5.1 billion.  

Fierce competition as mid-market PE exits heat up

In recent years, private equity exits have been few and far between, and the expectation was that there’d be a pick-up once Brexit was out of the way, and then the pandemic hit. However, confidence improved following the success of the vaccine rollout, prompting a wave of exit activity in Q4 2020 at a level not seen for three years.

The momentum was short-lived, however, as H1 2021 exit volumes dropped by 29 percent from 66 to 47, although exit activity was slightly higher in Q2. Interestingly, aggregate values increased by 38 percent from £4.5 billion to £6.2 billion due to the increasingly competitive dynamic between trade and private equity, as well as the increase in IPOs.

Trade and private equity accounted for over a third of all exits respectively, representing 72 percent of acquirers of mid-market PE exits. Whilst this competitive dynamic highlights an even split between trade and private equity, the values being paid by private equity were significantly higher. As they both hunt for quality assets, it’s clear that private equity investors have the monetary firepower to compete aggressively on price for these businesses.

Mid-market multiples soar to record highs

Whilst the price-earnings multiples paid remained flat during the first half of the year, at 9.4x earnings, the average multiple for private equity transactions rose from 8.9x earnings to 11.2x earnings. In a similar vein, the PE mid-market saw multiples soar to 11.9x earnings, up from 8.6x earnings in 2020 – the highest seen since 2017.

Outlook for H2 and beyond

While Brexit and the US election are no longer factors impacting investor confidence, the pandemic is still very much front of mind. It’s fair to say that any expectations about the future must be couched in an extra layer of cautious optimism. And, if the record-breaking level of PE activity in Q1, which then plateaued in Q2, is anything to go by, it’s a stark reminder that nothing can be taken for granted.

However, there are reasons to be optimistic. The M&A market is strong with lots of activity in high-growth sectors, and these will continue to attract high levels of interest from private equity, both domestic and overseas.

COVID-19 has accelerated a long-term change in the market’s approach, and given the varying impacts of the pandemic and lockdowns across different sectors, PE activity is likely to continue chasing robust sectors, along with those embracing ESG.

Confidence, pent-up demand and sheer relief is likely to lead to an increase in GDP and ensure a healthy market for mid-market PE transactions, albeit with substantial variation between sectors. Reserves of investment capital are high, debt is plentiful and uncertainties about Capital Gains Tax changes remain. This, coupled with the fact that at some point, PE owners are going to have to start exiting previous investments, means the conditions look positive for a continued resurgence in mid-market deal activity in the second half of 2021.