Private equity investment in Scots mid-market firms cools in H1 - but optimism over M&A outlook

Private equity investment in Scotland’s mid-market businesses cooled in the first half of this year amid troubled economic conditions, although the outlook for the UK’s deals market gives cause for optimism, according to a new report.

'It won't be too long before the M&A market becomes active again,' predicts Graeme Williams of KPMG UK. Picture: contributed.

The latest Mid-Market Private Equity report from KPMG UK found that 21 deals worth a collective £2.26 billion were completed in Scotland in the period, marking a 25 per cent year-on-year drop, as market volatility and tough trading conditions took hold. The number at a UK level also fell by about the same percentage, with 689 deals worth £70bn completed in the first half of 2023.

It comes after the professional services giant in February of this year said Scotland’s private equity market was outperforming the rest of the UK with deal values hitting a five-year high in 2022, and “soft growth” predicted for 2023. Furthermore, more than £2bn worth of deals was seen across Scotland’s private equity market in 2021 but activity had still not recovered to pre-pandemic levels.

Graeme Williams, head of corporate finance mergers and acquisitions (M&A) for Scotland at KPMG UK, said regarding the latest findings: “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 per cent 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."

He also looked at whether the M&A market will rebound in 2023. “Despite the drop in volumes, there are reasons to feel positive about the UK's M&A market,” he said. “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.”

The report comes after Scottish Equity Partners achieved an exit with the private equity-backed management buyout of global ecommerce agency Tryzens.