About KPMG Corporate Finance deals
In the second half of 2022, it is fair to say deal activity tailed off from the highs of H1 2022 and 2021 as existing uncertainties, such as geo-political tensions, energy crises and supply chain issues, were exacerbated by more immediate factors closer to home: rising inflation leading to higher interest rates, tighter debt markets and political and economic instability
As we go into 2023, we expect a continuation of this lower deal activity in the first half of the year, along with a marginal reduction in valuations across all sectors. Here’s what we expect to see in H1 2023:
- M&A activity returns to pre pandemic levels: Specifically tech and tech-enabled companies that support digital disruption will continue to attract interest from UK & overseas investors; larger corporates will look to sell off non-core assets to support their balance sheets & meet ESG pressures; whilst IPOs are not expected to come a viable route again before H2 2023.
- Private equity appetite: PE firms still have considerable levels of dry powder to invest and there is likely to more funds available than there are deals for some time. This will see more minority deals completed and the continued dominance of bolt-ons. The availability and cost of leveraged debt initially affected large cap deals but as the year progresses with increased stability, we expect the debt market will improve.
- Investment in scale ups: In addition to established businesses, early-stage businesses continue to look to raise money and grow, particularly in the tech space. Our recent investment in KPMG Acceleris supports fundraising opportunities for smaller, fast-growing businesses and it’s evident that there’s a growing need to develop stronger infrastructure in the UK to help these businesses as they look to realise their ambitions.
- Debt markets: Raising finance has become harder against an uncertain market backdrop. The cost of debt has also increased significantly and although stronger businesses continue to be able to source finance, pressure on both profitability and cashflow means some borrowers will be at risk of breaching covenants. With lenders needing more information and certainty before funding, strong preparation and delivery alongside targeting the right pockets of capital are now fundamental requirements for any successful financing.
- ESG-linked financing: As capital providers continue to focus on responsible investing, a compelling ESG strategy is now a pre-requisite for borrowers to achieve best financing execution and terms, and to ensuring ongoing access to capital in a tighter and more selective credit market. Formally sustainability-linked debt instruments also provide a powerful signal to stakeholders that a company can be taken seriously on ESG.
- Attractive sectors: Key sectors that have underpinned the economy – including healthcare, technology, business services, energy and differentiated businesses that are tech-enabled and disruptive – will continue to experience good levels of M&A activity. Companies with a clear ESG proposition will also attract strong investment as investors and strategics need to act on their ESG commitments. The consumer and real estate sectors will no doubt continue to face headwinds.
As inflationary pressures start to ease and the trajectory of the economy becomes clearer, the market should pick up again and we are expecting a greater volume of transaction completions from mid-2023. There are reasons to be optimistic with a large number of business start-ups and high-quality businesses continuing to attract institutional and strategic investment, both of which have significant firepower to deploy.
Robert Baxter
Partner
Head of Corporate Finance, UK
robert.baxter@kpmg.co.uk
