Deal activity holds up well amid significant uncertainty
Dealmakers at PKF Francis Clark have been keeping a close eye on the region’s deals market, as corporate finance partner Paul Stout explains.
Over recent years, we have become used to words such as exceptional, extraordinary or unprecedented when talking about global events and the UK economy.
Whilst 2022 could easily be described in similar terms – with decade-high interest rates, inflation exceeding 10% and the war in Ukraine – the reality is that after nearly 10 years of relative consistency for inflation and interest rates, we are now in an era where change and uncertainty are the norm. In my view, the next few years will be no different.
Robust deal volumes
Following a record year for transaction volumes in the South of England in 2021, it was perhaps not surprising that the region recorded a 5% decline for 2022, while the national picture was broadly flat. It’s perhaps more surprising that this decline wasn’t greater – especially as there were no ‘accelerators’ to drive transaction volumes, such as previous concerns over potential increases in Capital Gains Tax rates, though these may resurface before too long.
Most professionals involved in the region’s deals market were busy last year, even though transaction volumes declined. One factor supporting deal activity is the buy-and-build model pursued by serially acquisitive businesses, often backed by private equity.
For our annual Deals Review publication, we surveyed professional advisers and funders active across the South of England. Some 79% cited economic uncertainty as the biggest factor currently affecting dealmaking, with 85% saying this uncertainty was likely or very likely to have a negative impact on business valuations in 2023.
Sector variations
However, it’s important to note that recent economic shocks have impacted on sectors very differently, including in terms of input cost inflation and the ability of businesses to pass on higher prices to customers. This has led to wide variations in valuations. Businesses with recurring or contractual revenues, distant from traditional retail and consumer markets, have fared very well, with bidding wars for quality assets contradicting views from some buyers and equity funders that valuations were falling.
Nearly half of our respondents expect decreased levels of transactional activity in 2023, although 16% were more positive and expect it to increase.
Whilst I see numerous reasons for uncertainty this year, it has the potential to be calmer than all the turmoil of 2022. However, there are more significant potential changes for businesses and dealmakers slightly further out to 2024/25, when the potential impact of the upcoming General Election is considered. Whatever your view of the years ahead, unexpected shocks are still likely to happen, and more complex deal structuring or reduced day one pricing may be used to take into account the uncertainties.
Our 2022 Deals Review provides an analysis of transactions in the South region of the UK over the last year. It also includes hints and tips on thriving in the current economic environment, the increasing importance of business owners having more timely data to make informed decisions and choosing the right exit strategy.
Visit pkf-fccf.co.uk to read online or email [email protected] to request a hard copy.
