Disruption on a grand scale is perhaps the macro outlook for the world economy, but when we step back from the noise, what is the outlook for M&A and investment in the UK?
UK-based private equity firms have £178bn in dry powder they plan to deploy over the next three to five years, according to the BVCA (as of the end of October 2024). According to a survey of 200 private equity firms globally, published by Grant Thornton last month, two-thirds plan to increase investment over the next 12 months (50% for less bullish UK private equity funds). The biggest barrier to growth in the UK is recruitment and retention of talent.
Top five barriers to growth for UK private equity
- Finding and retaining top talent
- Regulatory environment
- Availability of finance
- Conditions for exits and liquidity events
- Deal sourcing
Peter Terry
Head of private equity, Grant Thornton
“All sectors are likely to be impacted by geopolitical stability, availability of finance and the economic climate. However, our survey shows that private equity keeps calm and doubles down in challenging conditions. Some 72% of respondents said their firm increases investments in volatile markets.”
Median M&A EV/revenue multiples
Stuart Clowser,
Head of private equity, RSM
“Average UK multiples for private businesses in the PE market peaked during the COVID-19 period; we’re now seeing multiples return to more pre-pandemic levels. That said, multiples vary across industries, with PE houses willing to pay more for sound businesses with a proven track record in certain industries, like technology and tech enabled services. Whereas businesses in more challenging industries, such as those heavily impacted by the rise in employers’ national insurance contributions, will face more due diligence and greater scrutiny, which could impact pricing.
“In 2024, EV/EBITDA multiples in Europe started to increase as high quality businesses were transacting at a higher price, and lower quality businesses that had exit plans were being delayed and not undergoing transactions.
“The impact of the pandemic, inflation and geopolitical uncertainty on performance has meant management teams and PE houses have held on to portfolio companies for longer than they would have historically, as they waited for performance to return to projected levels. As a result, there is a backlog of assets held beyond private equity’s typical holding period, so pressure is mounting on them to exit these portfolio companies.
“With weak economic growth, plus inflation continuing to rise above the Bank of England’s 2% target, it’s expected interest rate cuts will be more careful and gradual, which will only lead to greater uncertainty. Added to that, global conflict, tariffs and the fallout from the Autumn Budget means the anticipated resurgence in the deal market could be delayed. However, deals will still happen, but at a slower pace due to investors being more cautious. Once investors see greater certainty in the global market, there will be more of an impetus to get deals done.”
