UK private equity activity cools as market volatility bites, reveals new KPMG report

Mid-market private equity investment cooled in H1 2023, as economic and geopolitical uncertainty.

Mid-market private equity investment cooled in H1 2023, as economic and geopolitical

  • Mid-market private equity investment cooled in H1 2023 as economic and geopolitical uncertainty, debt market liquidity and pricing continued to impact investor confidence
  • Investment in TMT businesses declined by almost a third, while bolt-on and minority deals  rose  
  • Core building blocks for M&A are in place, but confidence and economic stability are key to unlocking the market

UK transactions involving mid-market private equity investors cooled in the first half of 2023 amid market volatility and tough trading conditions, new analysis from KPMG UK has revealed.

The firm’s latest Mid-Market Private Equity study shows that 327 deals worth £32 billion were completed in H1 2023, reflecting a drop in volume of 12 per cent when compared with the same period in 2022.

For the overall private equity market, however, more clouds appeared on the horizon as 689 deals worth £70 billion were completed in the first half of the year, compared to 909 deals completed in H1 2022.

Commenting on the findings, Alex Hartley, Head of Private Equity within Corporate Finance at KPMG UK, said: “While there were high hopes of a return to stability as we entered 2023, it soon became clear that rising inflation and interest rates, together with geopolitical uncertainty, continued to erode confidence and impact deal volumes. These challenges also impacted the debt markets and we saw a significant increase in the price of debt, a much more cautious approach from credit committees to new deals and reduced leverage multiples. The private equity mid-market has been more resilient to some of these factors, whereas larger private equity transactions have been more impacted by the debt markets in particular, with the overall private equity market declining in volume by almost a quarter. However, while deal volumes are down, the level of activity seen in H1 2023 is still on par with pre-Covid levels, and deals are still getting done, but, outside of the premium assets, are generally taking longer to complete.”

Business Services and TMT continue to steal the show

From a sector perspective, Business Services and Technology, Media and Telecommunications (TMT) took the top spots once again, accounting for almost two thirds (63 per cent) of all mid-market private equity deals in H1 2023. Business Services accounted for 46 per cent, up from 40 per cent in H1 2022, while TMT deals represented 17 per cent, down from an average of 21 per cent over the last five years.

“The drop in TMT transactions shows the sector is not immune from some of the challenges affecting other sectors over the past few years. Globally, TMT valuations are down and many of the US tech giants have seen layoffs, which have affected confidence in the sector. It is no longer all about revenues, investors want to see profits and a clear route through to cashflow,” Alex Hartley explained.

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Bolt-on deals prove a safer bet for investors

Bolt-ons accounted for the majority of investments in the private equity mid-market, continuing the trend of the past few years. There were 219 bolt-on transactions in H1 2023, representing a 47 per cent increase in volume on H1 2019. Overall, bolt-ons accounted for 67 per cent of all deals in H1 2023, up from 63.7 per cent over the same period in 2022 and 57.8 per cent on H1 2019.

Rob Baxter, Head of Corporate Finance at KPMG UK, said: “Bolt-on deals are attractive as they are seen as a lower risk option for deploying capital, particularly in a volatile economy, and they are viewed as a tried-and-trusted strategy to support the growth of existing platform businesses.  So investors are choosing to work smarter, rather than harder, putting their capital into industries and businesses they already know and understand, where they can leverage potential cost synergies to drive value.”

Will the M&A market return to form in 2023?

Rob Baxter concluded: “Looking ahead, there are certainly reasons to be optimistic about the outlook for the UK’s M&A market. Green shoots are already starting to appear from an economic perspective, with a slow down in inflation, and the hope is that this will create a more benign interest rate environment. With a general election due to happen in January 2025, if not before, the issue of potential changes to Capital Gains Tax returns to the fore. This is likely to be front of mind for business owners who are concerned about a potential tax rate rise, and as a result it could lead to a flurry of businesses coming to market, as owners look to de-risk their personal portfolios and release some wealth.

“The number of private equity exits in the first half of the year remained low yet again, but pressure is building on this front, so it’s just a matter of time until we see an eventual uptick in exits. At the same time, there’s an abundance of private equity dry powder which needs to be deployed into new investment activity sooner or later. Both factors could drive a significant increase in mid-market private equity activity given the right market conditions. Ultimately, the building blocks needed for dealmaking are already in place, and as greater economic, political and financial stability begins to return, it won’t be long before the M&A tap is turned back on.”



For further information, please contact:   

Jo Chileshe, Corporate Communications   

Mob: 07919 211 803

KPMG Press Office   
Tel:  +44 (0) 207 694 8773   
Follow us on twitter: @kpmguk   

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