UK Mid-Market M&A Not Getting Carried Away About a Change of Government

With the election imminent and potential changes to tax regimes on the horizon, we surveyed M&A advisers and private equity investors in the UK mid-market on how they expect deal volumes to evolve and which factors are thought to be the most important over the next 12 months.

While no respondents thought deal activity would fall if Labour takes power, UK mid-market opinion appears to be fairly split between a Labour government driving increased deal activity compared to a Conservative government, or having no effect at all. The 58% majority don’t expect to see any material effect from a change of government (figure 1).

Figure 1: What would be the expected effect of a Labour government, compared to a Conservative government, on deal-making over the next 12 months?

These respondents believe other macro factors, such as falling interest rates and a return to more stable GDP growth, are more important than which party ends up with a majority in the House of Commons (figure 2). It might also reflect the view in the industry that this incarnation of Labour is felt to be much more pro-business than its predecessor, and hence no worse (but equally no better) for deal-making than the incumbent government.

That no respondent expects deal activity to fall in the next 12 months in the event of a Labour government suggests investors do not view potential changes to taxation of carried interest as an immediate threat. There is a plethora of likely reasons for this: perhaps the market believes Labour’s bullish campaign talk may not translate into actual policy, or if it does, that a co-investment regime may soften the blow. Or simply that tax hikes won’t ultimately get in the way of the need to deploy record levels of dry powder into the UK mid-market, even if some funds choose to relocate overseas.

Figure 2: 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)

For the 42% of respondents who expect a Labour government to drive increased deal activity, there will be some who believe that, regardless of sector, the prospect of an increase to capital gains tax on businesses will push owners to sell their businesses sooner. However, investors and advisers who expect increased deal activity in our survey skewed to those focused on consumer and industrials assets, perhaps reflecting some additional confidence from these segments of the market that a Labour government will better facilitate industry growth (e.g. through greater support of SMEs, or through the execution of a more robust industrial strategy).

Stay tuned for our second part of this article, about the impact of upcoming macro factors on the UK mid-market, and which sectors and subsectors other participants are looking at closely, coming soon!