The latest trends in the M&A market

Thursday February 29, 2024

Mark Naughton reviews the current UK M&A landscape

On the up

There’s no denying that, across the board, 2023 was a relatively slow year for M&A activity. This was down to a myriad of much-publicised economic challenges – not least soaring inflation, increased interest rates and geopolitical turbulence – which impacted business confidence.

However, as some of these headwinds began to ease towards the latter part of the year and outlook improved, we saw the market start to recover and deliver a strong finish to Q4. This upwards trend was mirrored in our own activity and has continued into the first quarter of 2024. In the last three months FRP Corporate Finance have closed 27 transactions across M&A and Debt Advisory – one of our highest ever quarterly deal volumes – with a strong pipeline reflective of an increasingly buoyant market.

There are a variety of reasons for this more active start to the new year. As is often the case in January and February, there is a legacy of deals worked on in the closing months of the previous year that then get over the line. There is also the continued pressure on private equity investors in particular to invest the funds they have raised, either through new investments or supporting their portfolio to make acquisitions.

However, with market and business pressures like high inflation and interest rates stabilising, both alternative investor and trade buyer appetite has returned, meaning a good level of interest and competitive tension within both pools of prospective buyers. In addition, this stabilisation has contributed to the gap between buyer and seller valuations closing, making deals a more realistic prospect.

Political changes unlikely to shift the dial

Of course, newspaper headlines for much of the rest of this year will be dominated by the impending General Election. The political uncertainty that an imminent election can create often accelerates M&A activity rather than hampers it, with buyers and sellers keen to push transactions through before any potential changes come into play.

Historically, potential changes to Capital Gains Tax have influenced M&A activity. There appears to be less noise on this matter currently in the lead up to the Spring Budget and the pending General Election, as the major political parties seem to favour not making significant change. Of course, their policies can evolve as circumstances change and we will know more when each parties’ election manifestoes are released, but I would not be surprised to see a drive to get deals done prior to the General Election especially as there is risk that any party can change its policies once in government. In the short-term however, the Chancellor and government’s focus looks set to be more on consumers, or voters, so the likelihood of a surprise in relation to Capital Gains Tax is limited.

Most active players and sectors

Looking ahead, private equity will continue to be the main financial firepower driving the M&A market, with significant funds to deploy and the imperative to do so in search of returns for investors. At the same time, we are seeing another source of capital – search funds – beginning to influence the market. Currently more popular in the US than here, search funds use private money to back teams of people seeking out investment opportunities, and it will be interesting to see if this recent uptick in activity continues.

In terms of the industries currently attracting the most interest and investment, those that have displayed the most resilience against the challenging economic backdrop of the last few years – namely technology, media and healthcare – continue to do well. We’re also continuing to see more investment in the renewables and environmental consultancy sectors, supporting energy transition targets across areas from offshore wind to heating and insulation.

With interest rates expected to slowly come down, we could also see the construction sector return to health later this year. Regardless of which political party is in power, there are no shortage of pledges to tackle the housing crisis, from building more affordable homes to retrofitting existing housing stock to make it more sustainable, so an increase in investment there would be unsurprising.

Green shoots for overseas interest

High inflation and interest rates have meant the UK hasn’t been particularly attractive to overseas buyers to invest in, or at least no more so than their own geographies. But with interest rates stabilising and inflation predicted to come down further over the course of the year, there are green shoots that suggest the market here could become a lot more desirable to those further afield.

Ultimately, the market seems to have weathered a particularly blustery storm over the course of the last year, and a long-awaited positive outlook has returned. At FRP, we’re continuing to invest significantly in our Corporate Finance practice, to be able to support as many businesses as possible to capitalise on the more dynamic M&A market, whatever lies ahead.