Deals: Strength in uncertainty
The British political climate became increasingly turbulent as the year progressed. Liz Truss briefly became prime minister and oversaw the controversial “mini budget” from then-Chancellor Kwasi Kwarteng, which threw global markets into shock and ultimately saw them both being replaced. Commentators hope that, with Rishi Sunak now in place at number 10 to lead the country, there might be a return to relative stability.
While the full impact of the UK’s current economic policies is still to be felt, the deals market in the first half of this year was relatively buoyant.
Chris Thompson, director of the corporate finance team at business services group AAB, says: “Uncertainty is always going to make investment challenging, but there will always be winners. Capital flows into quality assets and businesses with strong management teams. And if businesses are providing critical services or products, they will remain attractive investment or acquisition propositions.”
The conflict in Ukraine has put a spotlight on energy supply and security. Thompson says that Scotland, with its energy industry legacy in oil and gas and its natural resources which suit renewables, mean it is well-positioned for investment. A focus on green energy and environmental, social and governance (ESG)-related investments is making Scotland increasingly appealing to global investors, according to commentators.
David Lightbody, a corporate partner at law firm, Brodies, says: “Scottish businesses haven’t had their woes to seek in recent years, as we continue on the path to recovery after the Covid-19 pandemic. M&A and investment activity has remained robust, but clearly businesses and investors are going to have to adjust to a new climate of cost inflation, higher interest rates and the knock-on effects on economic growth.”
He adds that in the most recent financial year, Brodies set new records in terms of deal flow and values, and that has held up strongly over the summer.
Lightbody says: “We see tech – particularly software, energy infrastructure and healthcare –continuing to benefit from their relevance and scalability in tackling some of the key global issues in today’s world. Scotland punches above its weight in all of these areas.
“A weak pound will benefit exporters of UK products, provided that those benefits are not cancelled out by rising supply chain costs.”
He adds: “The current high oil price is driving activity in the oil and gas sector and related services, so there’s plenty of investment activity there. And the journey to net-zero continues to drive investment, particularly in innovation and energy transition.”
Scotland is clearly successful in attracting tech companies and investment. For example, the Tech Nation Visa Report 2022, published in September, said that global tech talent is coming to Edinburgh in droves to fill a record number of job vacancies in the sector.
Gordon Steele, partner and head of deals in AAB’s corporate finance team, agrees that businesses in sectors such as tech and sustainability are continuing to prove popular.
He gives the example of the Scottish National Investment Bank in May this year committing £9 million to fund the development of Circularity Scotland, which aims to help people recycle billions ofsingle-use drinks containers every year. This helped deliver an additional £9m of capital from the Bank of Scotland for Circularity Scotland.
Steele also cites Scottish National Investment Bank’s £3m investment in travel technology business Travelnest to support the creation of new jobs and the targeting of new markets as being a success story in the tech sector.
Lightbody says: “High inflation incentivises the deployment of cash, and we know that there is still plentiful private equity money looking for a profitable home. Also, a depressed pound has favoured overseas buyers and investors.”
He says there are a number of cross-Border deal processes under way that have suddenly become much cheaper for those buying UK assets.
Lightbody adds: “Our strong sense is that for profitable businesses in the right sectors, there will continue to be exit and investment opportunities, despite the economic headwinds. Certainly, we as a firm have seen no slow-down in inward investment mandates from clients based in the US and other jurisdictions,” .
Turning to businesses that may find it harder to grow and attract investment in the current economic environment of cost of living concerns and high inflation, sectors that depend on discretionary consumer spending are thought likely to continue to struggle.
Thompson says: “With rising costs across the board, people are tightening the purse strings a bit more. As we get into winter, people may start going back into the office more when they see their energy bills. But that could mean more people in the city centres and higher footfall.”
Steele warns that businesses and organisations that are heavily dependent on the public purse, from local to national government, will be under more scrutiny. But he adds that the need to do things differently to get value for money may create opportunities.
Lightbody adds: “It is obvious that no business will be untouched by inflationary pressures, increasing interest rates, energy costs and a squeeze on consumer pockets.
“What is uncertain is the duration and depth of the impact of these factors.”