UK private equity activity cools in H1 2023, KPMG finds

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 £32bn were completed in H1 2023, reflecting a drop in volume of 12% 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 £70bn 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. “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.” From a sector perspective, Business Services and Technology, Media and Telecommunications (TMT) took the top spots once again, accounting for almost two thirds (63%) of all mid-market private equity deals in H1 2023. Business Services accounted for 46%, up from 40% in H1 2022, while TMT deals represented 17%, down from an average of 21% over the last five years. Hartley said: “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 cash flow.” 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% increase in volume on H1 2019. Overall, bolt-ons accounted for 67% of all deals in H1 2023, up from 63.7% over the same period in 2022 and 57.8% in H1 2019. Rob Baxter, head of corporate finance at KPMG UK, said: “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 slowdown in inflation, and the hope is that this will create a more benign interest rate environment. “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. 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.”

UK private equity activity cools in H1 2023, KPMG finds

The firm’s latest study shows that 327 deals worth £32bn were completed in H1 2023, reflecting a drop in volume of 12% when compared with the same period in 2022

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