Dealmaker interest in the UK mid-market rebounds

Private merger and acquisition (M&A) volumes in the UK mid-market are on the rise again, following a slump in late 2022 and a mild recovery in 2023, according to HSBC data. Growing confidence in the economy, stabilising interest rates and a high number of potential targets all mean that acquirers have their sights set on fresh opportunities. Private equity firms are increasingly deploying their capital into quality mid-market businesses, bolstering deal volumes and valuations. At the same time, these funds remain under pressure to deliver returns to their investors, which may encourage an upturn in portfolio business sales.

Mid-market M&A activity, while typically more resilient than megadeals and large company transactions, slowed a little in 2022 before recovering in the second half of 2023. Leveraged buyouts (LBOs) worth over £100mn had been among the many deal types to lose some buoyancy amid macroeconomic shockwaves from ongoing geopolitical instability. Some 50 LBOs over £100mn took place in the UK in 2023, with a record 14 accounted for by public-to-private transactions, according to HSBC data.

Corporate acquisitions of mid-market companies also stand to strengthen, driven by demand for cost-cutting opportunities, new capabilities and growth. Appetite for deals appears to be on the increase, experts note, particularly around perceived “safer” assets with resilient revenues, such as those focused on healthcare or technology. The expected growth in mid-market deals counts reflects that of wider UK M&A, which, after a volume slide in 2022, now shows “promising signs”, according to PwC, with markets steadying and confidence rebounding.

Strong valuations and high rates of deal completion underscore the potential gains of selling for UK-based mid-market businesses. At the same time, strong corporate balance sheets and the $2.49tn in dry powder waiting to be deployed by funds, according to S&P Global, may lead some businesses to view 2024 as a good time to seek a sale. For many founders, succession planning – or a desire simply to raise growth capital and reduce risk – is a strong motivator.

With 2024 potentially offering increasingly favourable macroeconomic and interest-rate conditions, and a continued imbalance between opportunities and uninvested private equity, the appeal of selling has increased. Jacques Callaghan, Head of UK Mid-Market M&A at HSBC, states: “Given that the general M&A market is still quite fragile, companies looking to sell need a longer time to prepare and to educate buyers, and will maximise their prices in bespoke sale processes.”

“It was previously quite difficult to predict how the consumer would react to the changing conditions, plus there was real volatility in input costs,” adds David Plowman, Head of UK Investment Banking at HSBC. “Now, it’s easier for boards and investors to have more confidence around forecasts for next year and beyond, and that makes it simpler to price deals.”

The desire to combat squeezed margins means there is also a “strong industrial logic for deals”, says Plowman. “A lot of agreements are being driven by the economic fundamentals: as wages rise, there is a need to reduce costs. For many firms, finding synergies by combining with another company is one of the few ways to improve profitability.”

Selling needn’t mean ceding control, however, with a handful of specialist investors offering minority investments to support growth. “The additional knowledge an experienced investor can bring should not be underestimated,” says David Whileman, Partner at the mid-market private equity fund Inflexion. “The strong valuations in the management buyout space are also seen in minority investments, so funds need to be effective at creating value.” Common approaches include suggesting expertise along sector lines, important to strategic quality and alignment.

The UK’s continued appeal to domestic and cross-border acquirers is due in part to its record of delivering cutting-edge innovation. “There will be an increase in the UK in the supply of private equity-owned portfolio companies coming up for sale, as firms have to demonstrate returns for fundraising considerations and the total of private equity exits above £100mn for 2023 and 2022 combined was less than for 2021,” says Callaghan.

Nonetheless, dealmakers face headwinds. Interest rates, while stabilising, remain elevated, and the UK is one of more than 40 countries with general elections scheduled for 2024. This adds to potential uncertainty. Under these conditions, funds that can identify the best businesses and set in motion effective plans will be the biggest winners, Whileman notes. “Investors must do more than just lever businesses. They've got to drive real value, which can include growth through international expansion, M&A or digital enhancement,” he says, noting that excellence in ESG and pricing are now also highly important. “Having the network to be able to attract excellent management teams is also crucial, since the leadership team underpins success in every business.”

UK mid-market M&A activity looks well placed for significant expansion as myriad opportunities continue to attract global attention. Acquirers and mid-market sellers alike work closely with HSBC, drawing from the bank's sector-specific and capital market expertise, as well as its strong balance sheet and international contacts book, to ensure success.

Jollyes, the UK-based pet retail chain, recently announced a sale to UK-based private equity fund, TDR Capital. The purchase, on which HSBC was both a lender and buy-side adviser to the fund, will provide new investment in Jollyes, targeting domestic growth opportunities through store expansions and improved experiences for customers, staff and suppliers.

Throughout 2024, opportunities will continue to emerge for UK mid-market businesses to maximise their own strengths and their broader potential through M&A. Acquirers from around the world are examining the market closely as they seek to find smart efficiencies and drive inorganic growth.

First published 22nd May, FT.com