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% on 2021 but up 13% on pre-pandemic levels

UK mid-market Private Equity firms invested £46 billion in 2022 – down 12% on 2021 but up

  • 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.”

Resilient sectors prove to be safe bets for investors

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.” 

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Mid-market PE exits continue to decline

Exit volumes fell by almost a quarter in 2022, when compared to 2021, with a total of 146 reported, while exit values saw an even more dramatic decline, with 2022’s aggregate value of £8.57 billion down 55.1 per cent on 2021. Trade acquirers accounted for over half of all exits with 79 deals, followed by secondary buy-outs with 61 deals. The ongoing volatility in capital markets meant that there were no IPO exits in 2022.

Despite market uncertainty, deal multiples rise

Despite market uncertainty, multiples in mid-market Private Equity deals increased in 2022 when compared to 2021, although they were still below pre-pandemic levels. The average multiple for mid-market Private Equity deals was 10.6x, up from 10.0x in 2021, but down from a high of 12.8x in 2019.

The average multiple for all M&A transactions was 10.8x, down from 11.9x in 2021, whilst across all Private Equity deals the average multiple was 10.7x, up from 10.1x in 2021.

Will M&A hold steady in 2023?

Rob concluded: “The future is always difficult to predict, however, there is a sense that expectations have adjusted and the situation is more stable than it was for most of 2022.

“Stability is key for investor confidence and decision-making, as it allows for factors like the availability and price of debt, consumer spending expectations or high energy prices to be priced into a deal. Access to funding is also crucial, and with the impact of economic headwinds weighing on cash generation and profitability, businesses looking to debt-fund transaction are likely to face increased scrutiny from lenders. Unlike the 2008 financial crisis, however, lenders and equity providers do have significant capital to deploy, but providers of capital will be selective, with more resilient businesses in sectors where there is a strategic imperative for change likely to be the beneficiaries.

“We may also see a boost in mid-market transaction levels as questions regarding the capital gains tax regime loom. Similar uncertainty over the last few years has weighed on private business owners, and owners who are mindful of an imminent increase may be tempted to push the button and get a deal done sooner rather than later.

“With the general consensus now being that any recessionary environment will be less severe than previously assumed, the desire for growth and investment using M&A will likely be on the agenda for many. Private Equity firms still have considerable amounts of dry powder to deploy and at present there’s more money than there are deals on the table. Demand for lower-risk opportunities, such as bolt-ons and minority deals, and for businesses in robust sectors, will continue. It may be a tough road ahead for the country and for businesses, but those who can weather the storm by remaining agile, focused and as prepared as possible, will emerge well-placed to take advantage of future opportunities.”



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Notes to Editors:   


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