PRIVATE equity investment in Scotland’s mid-market businesses cooled in the first half of 2023 as market volatility and tough trading conditions took hold, according to the latest analysis by KPMG UK.
The firm’s latest Mid-Market Private Equity report found that 21 deals worth £2.26 billion were completed in Scotland during the first six months of 2023, a drop in volume of 25 per cent when compared with the same half year period in 2022.
For the overall private equity market in the UK more clouds appeared on the horizon as 689 deals worth £70 billion were completed in the first half of the year, compared to 909 deals completed in H1 2022.
Commenting on the findings, Graeme Williams, head of corporate finance M&A for Scotland at KPMG UK, said: “As we stepped into 2023, many were hopeful that the market would stabilise. However, it quickly became clear that rising prices for goods and services, along with higher interest rates, and uncertainty about world events, 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.
“Overall, the private investment market had about 25% fewer deals. However, the level of activity seen in the first half of 2023 is still on par with pre-pandemic levels. Deals are still being made, but they are taking longer, unless they involve really good assets.”
Will the M&A market return to form in 2023?
Williams continued: “Despite the drop in volumes, there are reasons to feel positive about the UK’s M&A market. Signs of improvement are starting to emerge on the economic front, including a decrease in inflation. This could lead to a more favourable environment for interest rates. With a general election expected in January 2025 or even earlier, the topic of potential changes to Capital Gains Tax becomes important again. Business owners might be worried about a possible increase in tax rates, which could result in more businesses being put up for sale. Owners might want to reduce risk in their personal investments and access some of their wealth.
“While the number of private equity exits has remained low in the first half of the year, there’s growing pressure in this area. It’s only a matter of time until there’s an increase in exits. Additionally, there’s a lot of available private equity funds that need to be invested in new opportunities sooner or later. Both factors could lead to a significant rise in mid-market private equity activity, given the right market conditions. The foundation for making deals is already in place. As greater economic, political, and financial stability returns, it won’t be too long before the M&A market becomes active again.”
You can read KPMG UK’s latest mid-market PE snapshot in full: here.
