Scottish deal market 'slower to pick back up' after slide in private equity activity - KPMG

Brexit uncertainty and the ongoing pandemic took their toll on Scottish private equity activity last year, a report today suggests.
James Kergon, KPMG’s head of deal advisory in Scotland, said there are signs that the Scottish deal market has been slower to pick back up.James Kergon, KPMG’s head of deal advisory in Scotland, said there are signs that the Scottish deal market has been slower to pick back up.
James Kergon, KPMG’s head of deal advisory in Scotland, said there are signs that the Scottish deal market has been slower to pick back up.

The latest data from KPMG shows that there were just 23 “mid-market” transactions involving private equity investors in Scotland last year, down from 45 in 2019.

The combined value of the deals was down 49 per cent, from a bumper £3.2 billion in 2019 to just over £1.5bn last year.

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Across the UK, the value and volume of mid-market private equity deals – classed as deals valued at between £10 million and £300m – fell by a third on the previous year. In total, 452 mid-market transactions completed during 2020, with a combined value of just under £28.5bn.

KPMG said that while total annual deal volumes were ultimately hampered by the “cliff-fall” seen in the second quarter, there was a clear bounce-back in activity in the third and fourth quarters. Deals that had been put on hold “sprung back to life”.

Private equity investors sitting on substantial reserves of capital mobilised once more, the firm added, resulting in some 200 transactions completing in each of the final two quarters.

James Kergon, KPMG’s head of deal advisory in Scotland, said: “Across the UK we’re seeing what we’ve described as a ‘retreat and recovery’ picture.

“Naturally, the pandemic drove a significant, sharp collapse in deal activity with investors looking to protect their portfolio. Across England, activity and optimism seem to be returning, but there are signs that the Scottish deal market has been slower to pick back up.

“2019 was however a particularly strong year for Scottish investments, so, we remain optimistic that the climate here will steadily improve.

“Private equity investors are cash rich and there remains an appetite to invest in the right type of businesses. The additional concerns over forthcoming changes to the capital gains tax regime is also helping to drive a short surge in aiming to complete deals before the end of the financial year.”

He added: “The crisis also served to sharpen the focus of corporates on building resilience and efficiency by divesting non-core assets, an area in which we have seen strong private equity interest.”

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While mid-market deal volumes and value continued to struggle, larger deals remained more resilient, KPMG added.

Jonathan Boyers, head of mergers and acquisitions (M&A), said: “Firstly, we have seen a distinct lack of ‘mid-range’ deals coming through. This kind of transaction has been harder to execute because it is typically driven by lower-growth businesses in sectors that have been more impacted by the pandemic, such as manufacturing or industrials.

“Additionally, those smaller deals that did manage to get over the line saw reduced multiples due to the prevailing economic circumstances. Conversely, multiples in those sectors that continued to perform strongly throughout the pandemic, such as TMT [technology, media and telecommunications] and tech-enabled businesses, have remained high – and in some cases, have actually risen – with more capital chasing fewer high-quality deals.

“However, the fundamentals that underpin the private equity market remain strong. There are enormous amounts of dry powder available.”

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