Mid-market private equity investment activity in the UK declined by 10% in 2023, according to new research by KPMG. This echoes the trends faced by the broader deals market of the last year – but with possibly an even grimmer outlook for the coming year, as the quarterly figures for private equity investment look to still be trending down going into 2024.
Pressures from the global economy saw investors favour caution in their dealings over the last year. As a result, major merger and acquisition activity fell off a cliff for much of 2023 – with the number of high value M&A moves tumbling by 27%. While this presents a deeply dispiriting set of results compared to the record highs of 2022, the end of the year did provide glimmers of hope. The final two quarters both saw the number of merger and acquisitions deals grow before the close out of the year.
There has been no such rebound for the UK’s mid-market private equity investment market, though. Amid challenging macroeconomic conditions, the new Mid-Market Private Equity report from KPMG suggests that the market may not have bottomed out in the same way yet as wider M&A activity has.
The firm’s study analysed private equity deals with an enterprise value or deal value between £10 million and £300 million. The research found that mid-market transactions completed during the year fell by 10% to 675, from 735 transactions completed in 2022. And while the start of 2023 was actually brighter than the final quarter of 2022 – 202 deals to 182 respectively – every quarter following on saw the number of deals fall further, hitting 143, or the lowest quarterly figure since the lockdown phase of the pandemic.
Commenting on the findings, Alex Hartley, head of private equity within Corporate Finance at KPMG UK, said, “As we entered 2023, there were high hopes of a return to stability. However it soon became clear that rising inflation, high interest rates and geopolitical uncertainty weren’t going away any time soon. While a healthy number of transactions were completed in the first half of 2023, the macroeconomic instability that persisted led some vendors and purchasers to retreat and hold out for more favourable conditions.”
Looking ahead, this is not a trend which Hartley expects to reverse anytime soon, either, with private equity owners also less inclined to sell at present. The number of UK mid-market private equity-backed exits was down by 10%, from 202 deals in 2022 to 181 in 2023. Instead, many investors may look to make smaller additions to their portfolios to build value for a future sale. With 65% of mid-market deals in 2023 being bolt-ons, he asserted that he expected this trend to continue for the next 12 months at least.
In some sectors of the market, however, demand has remained resilient. In particular, business services saw only a small decline, to remain the dominant sector for deals, accounting for 44% of all deals, followed by technology, media and telecom (TMT), which made up 18%. However, the volume of TMT deals declined by 24% year-on-year, to the lowest level seen since 2018. Conversely, financial services was the only sector to completely buck the trend with an increase in investment activity, as 86 deals worth £9.5 billion were completed – an increase of 13.6% in volume when compared to 2022.
Aside from that rare glimmer of hope, however, it seems unlikely that the deals market for mid-market private equity investors will see large growth in the coming year. While Hartley admitted that these markets “do not need ultra-low interest rates and a bull market to flourish,” he added that they do need “economic and political stability, and over the last 12 months, both have been in short supply”. With major elections in the UK, US and Europe in the coming year, more disruption to that end seems unavoidable.
At the same time, he added, “While political uncertainty may well feature in 2024, UK dealmakers are hopeful for economic stability, aided by falling inflation and a steadier, falling interest rate environment. Financing costs, however, are likely to remain higher than we’ve seen for a long time. Against this mixed backdrop, the private equity industry itself looks set to experience structural changes, which could lead to consolidation.”