In part two of our M&A survey insights series (click here for part one in case you missed it), we look at how M&A advisers and private equity investors expect deal volumes to increase over the next 12 months, and which sectors and subsectors they see as the most attractive opportunities.
The mood music is positive: 95% of respondents anticipate deal volumes to increase over the next 12 months (figure 1), with 5% expecting similar levels, and no one envisaging a decline in volumes. A mix of factors is likely the source of this optimism: a brighter economic outlook, including projected falling interest rates, a more stable political backdrop, closer alignment on valuations between buyers and sellers, and record levels of dry powder in PE coffers.
While you might raise an eyebrow at the 26% of respondents projecting a 20% increase in deal volumes, PE buyouts fell so significantly in 2023 that a 20%+ rebound in 2024 is not unreasonable. In 2009-10, deals rebounded by 54% as the UK emerged from post-recession blues (figure 2). A 20% increase in volumes on 2023 would still leave 2024 volumes 8% below 2022 levels.
Figure 1: Compared to the last 12 months, how do you expect deal volumes to evolve over the next 12 months?
Figure 2: UK & Ireland Private Equity Deal Volumes, 1999-2023.
SOURCE: Unquote. N.B. Volume of UK&I PE Buyouts (green) and PE expansion deals (grey), 1999-2023.
Over a third of respondents believe the upward trend in deal volumes has already begun (figure 3). If the bounce-back doesn’t fully materialise in the quarter just gone, then the prevailing feeling is that another fairly quiet summer awaits, with the market rebounding in Q4 of this year.
Figure 3: Over the next 12 months, when do you expect deal volumes to increase?
As outlined in our previous article, respondents placed a lower weight on the outcome of the general election on M&A activity than on the impact of how interest rates will evolve and a return to sustained GDP growth. With Generative AI hype at an all-time high, it is unsurprising that technological advancements were also ranked as an important macro factor driving deal-making (figure 4).
Figure 4: Which macro factors will be most important in driving or inhibiting growth of UK mid-market M&A over the next 12 months? (please select and rank the top three)
We also asked advisers and investors which sectors they were focusing their time on over the next 12 months (figure 5), so we could hone in on where respondents believe the increase in deal activity will originate. Business Services and Software & Technology were the clear leaders in attracting participants’ focus over the next 12 months. This is no deviation from existing trends: Business Services and TMT made up 62% of UK mid-market PE volumes in 2023 (Source: Pitchbook).
Figure 5: Please select up to two sector groups that you are focusing your efforts on over the next 12 months.
At the subsector level (figure 6), business services interest is focused around professional and financial services. Attractive underlying characteristics (and a dash of FOMO) has driven around 20 funds to invest in accountancy buy-and-build platforms, many of which have been highly acquisitive over the last 12 months. The market waits with bated breath for an impending round of secondaries. As some funds begins to wonder whether the accounting market is reaching saturation, interest in other, less competitive segments that offer a similar buy and build opportunity, in particular legal services, is growing.
Figure 6: Are there any specific subsectors that you believe represent an attractive investment opportunity over the next 12 months?
N.B. Other subsectors in business services were education, social housing, and biodiversity consulting. Only one respondent in healthcare & life sciences specified a target subsector (pharmaceuticals).
Within technology, PE interest in the cyber security market remains strong. Geopolitical instability, which increases the spectre of state sponsored attacks, and the democratisation and amplification of threats via generative AI, are driving demand for software and services. The challenge will be fending off the competition for quality assets in fast growing segments of the market.
Industrials investors and advisers are focused on energy and utilities assets, a continuing trend given the number of recent deals into wind power service providers, and interest increasing into other fast-growing segments supporting the energy transition (e.g. industrial heat pumps). The built environment remains an important component of industrials PE deal-making, and may benefit from a market upturn as lower interest rates drive up the construction market.
It’s not surprising that investors expect most consumer deal-making to concentrate in luxury & fashion, e-commerce, and health & beauty categories. Those who spend on luxury are less impacted by the cost-of-living squeeze, while e-commerce and consumer health & wellbeing continue their long-term growth trajectories, both accelerated by COVID-19.
If you would like to learn more about any of the specific trends, or M&A activity in any of the subsectors highlighted in this article, please get in touch.
