And in the UK, inflation and interest rates have risen, while the value of sterling has fluctuated and the Bank of England has warned of a growing risk of recession.

However, Scottish and UK businesses are still attracting investment and deals are being done. Certain sectors are proving to be resilient, including technology and life sciences. The Experian MarketIQ report for the first half of the year said that “deal-making in the UK slowed in the first half of 2022 in comparison with the near-record-breaking post-pandemic highs we reported at this point last year, as market sentiment grew more cautious in the face of an uncertain outlook”.

Jane Turner, research manager at Experian MarketIQ, added: “Despite stronger headwinds, there is still optimism in the market – whilst dealmaking slowed in the first half of the year, buy-outs remained resilient as private equity houses continued to deploy substantial reserves of unallocated capital.”

The coronavirus pandemic, war in Ukraine, UK interest rates rising – there have been many things for the market to weather. Image: Adobe Stock

Its analysis of Scotland shows that a total of 183 deals were recorded for the first half of this year. Although this was 16 per cent fewer than seen at the start of 2021, the report described it as a positive start as the country “resets” post-pandemic. Year-on-year, valuations were up 19 per cent to just under £14 billion for the year to date, in comparison to £11.7bn last year.

Five “mega deals” accounted for close to 75 per cent of Scotland’s total deal value for the first six months of the year. But while corporate acquisitions accounted for the bulk of deal activity, private equity and growth capital transactions represented almost a quarter of all deals.

Experian reported that tech, construction and healthcare deals continued to gather momentum, with all three sectors seeing a surge in volume.

Private equity and venture capital (VC) funded activity accounted for nearly a quarter of Scotland’s deals, with Experian showing that Scottish Enterprise and Business Growth Fund were the most active investors.

Focusing on the start of 2022, Neil Burgess, partner who leads the corporate and commercial practice at law firm, Brodies, says: “We’ve seen robust levels of activity across the board for Scottish dealmakers. Our experience mirrors theExperian report with deal volumes being slightly down in the first half of this year, but that’s compared against a bumper time for mergers and acquisitions [M&A] in 2021. So, despite volumes being down, it was nevertheless a positive start to 2022.”

He describes a slight softening in the deals market at the start of the Ukraine conflict in February, followed by a steady improvement since then.

“Last year the market enjoyed, in some respects, uniquely favourable conditions for dealmaking. This year we’ve had to contend with well-documented economic headwinds. But we’re still seeing healthy activity levels as people navigate their way through the new set of uncertainties in the market that dealmakers are facing.”

He says that there are a range of economic challenges on a global scale. These include the combination of high inflation, increasing interest rates, soaring cost of living, the energy crisis and disruption in supply chains that are adding to longer-term issues, such as staff shortages in some industries.

Against this backdrop, Burgess has seen a growing number of entrepreneurs and business owners exploring exit options. He explains that many are taking the opportunity to release some of the wealth they have built up, deciding now is the right time to look for an exit. “In some respects, the current wider economic conditions might be driving some transactions to happen,” he says. “We still have a fairly attractive tax regime for exits and trade sales.”

So, according to Burgess, there are supply side reasons which explain why vendors have still been coming to the market. Meanwhile, on the demand side, he is seeing no shortage of appetite among buyers.

“You still have a high level of demand from private equity with a lot of capital to deploy,” Burgess says. “And there are a number of corporates that managed to maintain and develop very strong balance sheets over the course of the pandemic. There are opportunities for bolt-ons, consolidation acquisitions and strategic plays for those looking to grow.”

In the short term, he points out that UK assets are increasingly going to represent an attractive opportunity for overseas buyers and private equity is still strong. Burgess gives the example of the KPMG Venture Pulse Survey which found that investment in fast-growing Scottish businesses reached £325 million in the second quarter of the year. Such businesses attracted more than £500m of VC investment in the first half of 2022, despite investors being generally more cautious globally, according to the report.

He says: “Such statistics are really encouraging and support the contention that private equity investment in the mid-market in Scotland in the first half of the year surpassed pre-pandemic levels. Sectors like life sciences and technology are popular.”

Chris Thompson, director of the corporate finance team at business services group AAB, agrees that while it has been a bit of a “mixed bag” when it comes to deals in the first half of the year, there has still been a healthy amount of investment. He points to strong deal flow and plenty of capital in the market, particularly in more resilient sectors.

“The tech sector in Scotland is still performing strongly with a lot of investment from the likes of angel syndicates and venture capital funds,” says Thompson.

Gordon Steele, partner and head of deals in AAB’s corporate finance team, points out that the Scottish National Investment Bank was very active in the first half of the year and was involved in a number of its deals.

The bank was launched in November 2020 to focus on “patient investment”. In 2022, it has invested more than £140m in a dozen businesses and projects across Scotland, according to its first full-year accounts published at the start of October.

On investment in general at the start of 2022, Steele says: “With a large number of the deals that happened in the first half of this year, we would have commenced discussions and negotiations in the second half of 2021. A lot of businesses involved in transactions are robust ones that performed well during Covid.”

But he explains there have been challenges to address, not least the conflict in Ukraine which may have put the stop to some deals, or at least paused them. Another challenge, according to Steele, is trying to ascertain what the future holds for businesses when assessing them for deals. This involves delving into their pre-pandemic performance and making adjustments for the impact of Covid-19.

“This can be difficult in practice,” he says. “We see some businesses trading a bit behind their strategic plan due to the pandemic – despite having performed reasonably well over that time – when it comes to doing more acquisitions, opening new outlets or adding new product lines.”

Another big feature at the moment, says Steele, is analysing the cost base of businesses going forward, looking at such elements as oil and gas prices, salaries and inflation.

Thompson supports this view saying that a key challenge is to understand and normalise the profits of businesses following the disruption of recent years. “We had the pandemic starting in 2020, some growth as things began to return to normal in 2021, and this year we’ve seen things like higher energy costs and interest rates,” he adds. “We need to understand what a business is worth in a ‘new normal’. That’s an issue for a number of companies and M&As when share prices have been so volatile. But there are opportunities, such as the pound being a lot cheaper than the dollar which can help US trade acquirers.”

In terms of where investment was coming from in the first half of this year, Thompson says private equity funds had “dry powder” – cash that had to be deployed. “This led to a healthy flow of PE investment,” he adds.

Interest in Scottish business remained strong from the US and Canada, for example through acquisitions in the IT sector, including software companies. And Steele says large trade aggregators, included listed companies, have significant cash at their disposal for strategic acquisitions.

Looking to what is likely to be on the horizon when it comes to investment, Steele says: “I expect there to be a cautious approach to pricing deals, especially for businesses that are capital intensive as they might have higher energy costs because of fossil fuel use and be heavily impacted by inflation. Some sellers may have to recalibrate their expectations.”

Brodies’ Burgess believes that economic uncertainty and market volatility may well affect risk appetite in certain sectors, so deal flow is likely to soften slightly. He concludes: “In the next six to 12 months, we’ll see some adjustment in certain sectors. But there are opportunities out there and in many cases there are compelling reasons for companies to push ahead with strategic deals.”

Deals: Resilience in teeth of relentless head winds