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FinanceNorthern Private Equity Activity Declines as Investor Caution Increases, but Optimism Emerges

Northern Private Equity Activity Declines as Investor Caution Increases, but Optimism Emerges

KPMG’s most recent study of UK transactions involving mid-market Private Equity investors presented a cooling in the Northern deals market in 2022.

Over the span of the year 149 deals were completed, worth £9.3bn, reflecting a year-on-year decrease of 19.9 percent and 7.9 percent, respectively – according to new analysis from KPMG UK.

The picture for the overall UK Private Equity Mid-Market was similar, with the total value of deals down 12 percent to £46bn in 2022, and volumes down by 19 percent to 680.

However, despite the challenging conditions, the North of England retained its market share completing just over a fifth (22 per cent) of all transactions in the UK market. The North West remains the greatest driver for volume and value of deals in the North.

From a sector perspective across the UK, 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 percent) of all mid-market Private Equity deals in 2022.

Christian Mayo, Head of Corporate Finance in the North at KPMG, said: “The private equity mid-market saw a record year of activity in 2021 so it isn’t that surprising that deal volumes and values have cooled a little as the market normalises. Many across the Northern market saw buoyant activity at the start of last year but strong economic and geopolitical headwinds pumped the brakes a little on that momentum.

“Investors and business leaders have been monitoring closely how those conditions unfold and what the impact of high inflation, interest rates and the wider cost-of-living crisis might be. Such uncertainty breeds caution and inevitably put some mandates on ice.

Rick Stark, Head of Private Equity at KPMG in the North, said: “Considering all the factors at play in the economy, the decline in volumes and values we saw across the North wasn’t quite as dramatic as many expected. Furthermore, it is encouraging that the Northern market has retained a healthy share of activity that reflects the continued strength of the investment community here and the quality stable of ambitious, investable and attractive businesses that call the North home. With deal volumes and values comparing well in the North West and Yorkshire against pre-pandemic performance, there is a hint of optimism emerging that 2023 may be more stable and see some growth.”

Regional breakdown

North West

The North West accounted for just over a tenth (11.2 per cent) of the UK private equity mid-market making it the active market outside of London. The region saw 76 transactions in 2022, down nearly a quarter (23.2 per cent) from 99 in 2021. While the region also retained its position as the most valuable market outside of London combined deal values also fell from £5.4bn to 4.8bn. Compared to pre-pandemic levels, the North West’s mid-market activity volume and values were both up seven per cent.

Yorkshire & Humber

Yorkshire & Humber regained ground in the private equity mid-market increasing its market share of transactions to 8.4 per cent from 7.7 per cent over the past year. While the value of transactions in 2022 (£3.7bn) rose slightly against 2021 (£3.6bn) by two per cent, the volume of activity fell over the period from 65 to 57 (12.3 per cent decline). Compared to pre-pandemic levels, both volume and value are up (16.3 per cent and 14.6% respectively).

North East

The North East recorded 16 mid-market private equity transactions in 2022, down from 22 in 2021 (down 27.3 per cent). The combined value of deals also fell from £1.1bn to £0.8bn (down 16.4 per cent). The level of activity also saw the region lose some market share against other regions, now accounting for 2.4 per cent of the overall market, down from 2.6 per cent last year. Compared to pre-pandemic levels, deal volumes and values were also down (33.3 per cent and 42.9 per cent respectively).

Will M&A hold steady in 2023?

Christian Mayo added: “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.

Rick Stark concluded: “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 noise around potential increases in CGT rates 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.”

Olivia McHugh
Olivia McHugh
Staff writer
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