Autumn M&A update    

Reasons for optimism    

Over the last quarter, ‘uncertainty’ has been the defining theme for M&A. Firms have been carefully navigating a fast-changing geopolitical environment and, most recently, waiting for the long-trailed Autumn Budget to finally arrive.

While this has led to a generally cautious market sentiment, when looking under the surface the picture becomes a lot more nuanced – there have been real areas of significant activity.

Private equity investors continue to have dry powder to invest, particularly in assets that exhibit recurring revenues, have strong technology or artificial intelligence capabilities and alignment on ESG strategies.

Tech-enabled services, pure-play technology and healthcare are all sectors that perform well against these measures and are where we’ve seen strong private equity attention, particularly where there are also fragmented markets, and where private equity investors see opportunity through buy-and-build platforms.

Tech rises to the top of the ticket, but traditional sectors hold their own

However, the interest in technology certainly isn’t isolated to private equity investors. There’s been widespread interest in, and competition for, both pureplay technology firms, or those businesses in other sectors that demonstrate strong digital capabilities or AI advancement – something that we expect to remain an important element of the M&A landscape.   

That said, the UK’s more traditional manufacturing and industrial sectors, including technical services, are also still seen as attractive prospects. Recently, we’ve seen notable interest in these businesses from overseas investors. For them, the UK offers a strategic hub that has a degree of isolation from the European market.  

Legal services, in particular, has seen a wave of private equity activity so far this year – one that’s only likely to continue. This, in part, is a reflection of the sector’s profitability, relative stability and opportunity for consolidation.

And overseas private equity funds, in both the US and also recently Scandinavia, see the UK’s mid-market as somewhere they can pick up high-quality assets with significant growth potential. A good example of this appetite was seen by Nobel Fire Systems, a value-added distributor of fire detection and suppression solutions that we supported in securing investment from Swedish private equity firm Systematic Growth.

Looking ahead

As we approach the end of this year, there are many reasons to be optimistic when it comes to the outlook for the dealmaking market.

There are signs that the valuation gap that emerged in recent times between buyers and sellers is starting to narrow. For vendors that aren’t differentiated through technology, valuation metrics have reduced from the levels seen historically. To get deals over the line, sellers seem to be accepting this and are becoming more flexible with both deal pricing and structure. In particular, we’re seeing more shareholders willing to consider deferred structures or earnouts.

Furthermore, simply having clarity post-Budget could give businesses more confidence to press ahead with any M&A plans that had been on pause, or launch new activity.

From an M&A perspective, the Budget was a relatively quiet event, with the most significant measure being the immediate reduction in CGT relief on qualifying disposals to Employee Ownership Trusts (EOTs). Given the levels of tax relief still available, and the wider benefits that EOTs offer in terms of cultural preservation and talent retention, we don’t expect the reduction to significantly diminish EOTs’ attractiveness as an option for vendors. However, owners who had already made exit plans based on the assumption of 100% relief will now need to check whether sticking with this strategy still delivers the outcomes they’d intended, or whether they might need to adjust their plans or timing.

Looking ahead, what’s certain in the M&A market is that the best outcomes will come from having well thought-out long-term growth strategies.

In fast-changing environments like these, there’s even more value in taking time to prepare strong M&A approaches, and for boards, lenders, investors and management teams to make sure they have the right support, from the right advisers, well ahead of strategic activity.