Mid-market* private equity investment activity in the UK declined by 10% in 2023, as challenging macroeconomic conditions presented few glimmers of hope for recovery, according to KPMG UK’s latest Mid-market Private Equity report.

The firm’s most recent M&A study has revealed that 675 mid-market transactions were completed during the year, representing a 10% drop when compared to the 735 transactions completed in 2022. Meanwhile, the UK Private Equity market overall witnessed a more significant decline, with the total volume of deals down by 20% from 1,802 in 2022 to 1,451 in 2023.

Whilst across the board, deal volumes were down in 2023, Business Services remained the dominant sector for activity accounting for 44% of all deals, followed by Tech, Media and Telco (TMT) which made up almost a fifth (18%). However, the volume of TMT deals declined by almost a quarter (24%) year-on-year to the lowest level seen in five years. Conversely, Financial Services was the only sector to buck the trend with an increase in investment activity, as 86 deals worth £9.5 billion were completed representing an increase of 13.6% in volume when compared to 2022.

The number of UK mid-market private equity-backed exits remained low this year, with the volume also down by 10%, from 202 deals in 2022 to 181 in 2023.

Will M&A return to form in 2024?

M&A markets do not need ultra-low interest rates and a bull market to flourish, but they do need economic and political stability, and over the last 12 months, both have been in short supply. There are a few variables ahead that will inevitably have an impact on the market, with major elections set for the US, UK and Europe, and ongoing geopolitical uncertainty across the globe.

Whilst political uncertainty may well feature in 2024, UK dealmakers are hopeful for economic stability, aided by falling inflation and a steadier, falling interest rate environment. Financing costs, however, are likely to remain higher than we’ve seen for a long time. Against this mixed backdrop, the private equity industry itself looks set to experience structural changes, which could lead to consolidation.

That being said, overall the fundamentals that underpin the private equity market are still very much in place. Capital is available, valuations have started to normalise and the debt markets are still supportive - albeit with greater scrutiny and higher costs. This, together with the stability that bolsters the confidence of Boards, Investment Committees and Credit Committees, should pave the way for a more positive dealmaking environment in 2024.

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