UK private equity market soars as deal activity sets new record

Alex Hartley, Head of Private Equity within KPMG’s UK Corporate Finance practice, said:

“After a period of very high deal multiples in the M&A market over the past few years, coupled with the increased volume of transactions in 2021, the stability of multiples reflects the premium pricing being achieved on high quality assets. On the back of subdued volumes in 2020, following the initial COVID-19 uncertainty, there was a hive of activity in early 2021 as investors competed to secure quality businesses. Notably, in H2, private equity investors started to take a more cautious and analytical approach, in light of the evolving situation at home and abroad, to satisfy themselves on the resilience of businesses and the markets they operate in.

“Another standout highlight in our data is that IPOs are back in the game, and not only in the UK but across the globe. Over 120 companies listed in the UK, raising £16.8bn, while the US saw a record number completed and the Eurozone also recorded the highest level of IPOs for several years. This notable surge suggests that vendors of high-performing businesses sought to take advantage of the markets being open and the multiples that IPOs can deliver.”

Mid-market exits cool, but values remain hot

The number of private equity exits fell from 178 in 2020 to 162 in 2021, although this still surpassed 2019 levels of exit activity. Deal values, however, increased by 13 per cent, from £13.6bn to £15.4bn.

Jonathan Boyers commented: “The real story with exits is not so much the year-on-year comparison, but the huge spike in exits we saw in Q4 2020 and Q1 2021. Business and investor confidence picked up swiftly towards the end of 2020, and this optimism, along with a rush to finalise deals before the anticipated changes to Capital Gains Tax drove a flurry of activity.

“There is also a noticeable and growing imbalance between the number of new investments and exits being made, and there will need to be a correction at some point, though this is unlikely to happen while the market remains particularly volatile

Investment in TMT and Business Services businesses booms

Although deal volumes rose across all sectors, business services was the standout performer, with activity up from 215 deals in 2020 to 312 in 2021, and values rose by over 50 per cent to £15.5bn, up from 2020’s £10bn and £14bn in 2019. The allure of TMT businesses also held strong as the effect of remote and hybrid working buoyed investment in the sector, with 2021 deals up by 55 per cent. In line with heightened activity in online retail and direct-to-consumer sales, consumer goods and retail, deal activity also saw an increase.

Alex Hartley said: “Together, TMT and business services accounted for almost two thirds of private equity deals in the mid-market last year, and it’s a no brainer given how resilient tech firms have shown themselves to be in recent times. It’s also testament to the numerous successful start-ups coming out of the UK’s tech hubs and moving into the accelerator phase, as these are attracting private equity interest as they scale up. There’s no shortage of high-quality businesses in those in-demand sectors, or those that are tech-enabled. This, along with the abundance of private equity money which needs to find a home, means the market will flow.”

Will 2022 be another exceptional year for M&A?

Jonathan Boyers concluded: “After two years of being clouded by much uncertainty, 2022 looks set to be a clearer year of trading, as many of the challenges that have impacted private equity, like Brexit and COVID-19, are lessening. Investor appetite is strong and private equity funds remain eager to deploy their ample dry powder, so healthy levels of activity will continue. It should also be easier to value companies without so much uncertainty in the market, which in turn will make it easier for private equity houses to move forward with conviction when looking for the best investment opportunities. And this will encourage more deal flow – at least in the short-medium term.

“ESG will also be an important driving force that we’ll see more and more in 2022, as it will be integrated into every area of operations, and become part and parcel of what investors expect and look out for. Other key trends that will be front of mind for those thinking about their M&A strategies are the National Security and Investment Act, the growth of the UK’s TMT sector and the Government’s ‘levelling up’ agenda.

“So while there’s still a layer of unpredictability to be mindful of, well-run mid-market businesses who have demonstrated not only the ability to weather the storm, but the potential for growth, should have no trouble finding the investment they need to achieve their ambitions.”

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For further information, please contact:

Jo Chileshe, Senior PR Manager, KPMG

Tel: 07919 211 803

Email: jo.chileshe@kpmg.co.uk

 

KPMG Press Office: 020 7694 8773

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