Mid-market private equity investment cooled in the first half of 2023 as economic volatility, geopolitical uncertainty and debt market liquidity and pricing continued to impact investor confidence and lengthen deal processes. Whilst some sectors were initially resilient, persistent inflation and high interest rates inexorably affected all sectors by mid-2023.
- Deals volumes down and deal cycles lengthen: H1 2023 deal volumes are down, but still on par with pre-Covid levels. However, political and economic instability has meant that, outside of deals involving premium businesses, transactions are taking longer to complete.
- Debt market liquidity and debt pricing impacted deal completions: PE begins to broaden their gaze to minority deals which often don’t require a significant debt raise.
- Mid-market momentum: Mid-market PE deals accounted for almost 50% of total PE activity in H1 2023, and interest is particularly favourable to those businesses with a strong ESG/sustainability lens.
- TMT deals cool: Decline in TMT deals shows tech businesses are not immune from some of the challenges and investor expectations in other sectors.
- Boom time for bolt-ons: PE investors continue to take the tried-and-trusted approach to value creation through bolt-on acquisitions.
- Appetite for ESG: Businesses with a strong ESG proposition have been driving deal activity, and impact funds, alongside demand from more conventional funds, will support disproportionality higher levels of interest and valuations on these assets going forwards.
- Uptick in exits on the horizon: PE exits fell to historically low levels, storing up a back log of transactions that must eventually be realised.
Despite this, there are plenty of reasons for optimism. Record levels of dry power need to be deployed and green shoots signal a slowdown in inflation which should hopefully make for a more benign interest rate environment. An upcoming election and a possible government change may reignite the Capital Gains Tax debate, which could lead to business owners starting sale processes sooner than expected.
Alex Hartley
Partner
Head of Corporate Finance, UK
alex.hartley@kpmg.co.uk
