UK Private Equity activity declines as investor caution increases, but signs of optimism for 2023

• UK mid-market Private Equity firms invested £46 billion in 2022 – down 12 per cent on 2021 but up 13 per cent on pre-pandemic levels
• Demand for TMT and Business Services businesses continued to increase, accounting for 3 in 5 deals
• Positivity is returning for UK’s M&A market in 2023, as expectations adjust

After a record year in 2021, with 843 deals completed, KPMG’s latest study of UK transactions involving mid-market Private Equity investors showed a cooling in the deals market in 2022.

Over the course of the year 680 deals were completed, worth £46 billion, reflecting a year-on-year decrease of 19 per cent and 12 per cent, respectively - according to new analysis from KPMG UK.

The picture for the overall UK Private Equity market was similar, with the total value of deals down 6 per cent from £180 billion in 2021 to £170 billion in 2022, and volumes down by 16.5 per cent from 1,850 in 2021 to 1,544 in 2022.

However, despite ongoing economic and geopolitical uncertainty, UK mid-market Private Equity investment in 2022 grew by 13 per cent, at £46 billion, when compared against 2019 - the last ‘normal’ year - which saw £41 billion invested.

Rob Baxter, Head of KPMG UK’s Corporate Finance practice, said: “After a record year of dealmaking activity in 2021, it was perhaps inevitable that the market would begin to normalise. 2022 began on a strong footing with significant activity in the first quarter before economic and geopolitical headwinds began to gather pace. The impact of these issues was exacerbated by rising inflation, high interest rates and the cost-of-living crisis. Uncertainty is no friend of M&A, and as market turbulence began to increase, it prompted investors to take a more cautious approach.

“However, the decline in deal values and volumes was far less dramatic than many expected, and the mid-market Private Equity market proved more resilient than the overall Private Equity market. Unlike some larger deals, the mid-market is typically not dependent on multi-bank debt solutions supporting large debt packages, reducing some of the impact of the travails of the lending market.”

From a sector perspective, Business Services and Technology, Media and Telecommunications (TMT) took the top spots for M&A activity as they have done consistently for the last few years. Together they accounted for almost two thirds (63 per cent) of all mid-market Private Equity deals in 2022, with Business Services accounting for 40 per cent and TMT for 23 per cent. Financial Services and Healthcare deals also held steady, accounting for 11 per cent and just over 9 per cent, respectively. Healthcare saw a noticeable spike, with the volume of deals up almost 38 per cent and values up 47 per cent on 2019’s figures, reflecting the growing demand for private-pay healthcare services and the related ecosystem. Energy was the only sector that saw an increase in deal activity in both values and volumes when compared to 2021 – with 28 deals worth £3.5 billion completed in 2022, compared to 25 worth £1.9 billion in 2021. The picture for the Consumer Goods and Retail and Industrials sectors was less rosy, with both noting a decline in deal values and volumes when compared to 2021, as well as a reduced share of overall mid-market deal activity.

Rob added: “Sectors which are heavily reliant on consumer spending have seen the greatest reduction in deal activity, as rising inflation throughout supply chains and the cost-of-living crisis have squeezed profit margins and reduced revenues. However, some sectors have shown real resilience to recent economic and geopolitical instability and this more solid footing has provided a stable basis for continued M&A activity. This is particularly noticeable in sectors where there’s a strategic imperative for change, like the energy transition, for example.”