UK private equity activity cooled over the first half of 2022, as the global deals scene began to brace for a potential recession. However, as businesses turn to professional services firms to help up their resilience, deals for business services operators accelerated.
Private equity deal volumes in the UK have fallen in the first half of 2022. This is partially due to the fact 2021 represented an unusual peak in activity – exceeding historic levels of both deal volumes and values – so even as activity falls, it remains higher than the same period in 2018 or 2019. But there are other trends at play that are less easily explained away.
With a deep recession increasingly thought to be inbound in 2022, buyers seem less willing to take a punt on a new project than in the previous 12 months. According to new research from KPMG, the UK’s private equity market saw deal multiples (financial metrics used to value companies) from a record level of 13.5x in 2021 to 10.9x in H1 2022. While that remains higher than rates seen before the pandemic, it suggests that attitudes are cooling when it comes to paying the inflated price tags associated with some assets.
This trend was less pronounced in the mid-market segment – where deal multiples dropped only marginally from 12x in 2021 to 11.4x in the first half of the year. This suggests that private equity firms still see a high volume of mid-market businesses and mid-market funds which can meet growth expectations, whatever the situation.
Jonathan Boyers, Head of KPMG’s UK Corporate Finance practice, commented, “Mid-market valuations have performed slightly better due to the volume of deals in the TMT and Business Services sectors, which contributed almost two-thirds of deal activity in this market. Given these sectors’ resilience, I expect this trend to continue.”
Business services companies include professional services, accounting, consulting, corporate turnaround and legal operators. Such firms are often highly sought after when periods of economic stress manifest – as they can deliver strategies to make firms more resilient, or find areas where costs can be cut. At the same time, investing in the latest technology, media, and telecom (TMT) is often seen as a way of out-flanking competitors in tightening markets. As such, business services and TMT accounted for 60% of private equity investments in the UK.
Neil McManus, Head of Business Services M&A at KPMG in the UK, added, “There is plenty of potential for consolidation, particularly in certain sub-sectors like accountancy services or testing, inspection and compliance services. This is attractive from a private equity perspective as it provides an opportunity to deploy follow-on capital into existing platform investments that are already known and understood, a lower risk strategy in the current environment.”
The UK’s fall in private equity activity is in line with a global trend. Despite record levels of dry powder, the global private equity industry is seeing both deal volumes and fundraising levels decline from the previous year, according to the latest private equity report from Bain & Company. The firm found that in the first half of 2022, private equity generated $512 billion in buyout deal value, lower than buyout deal value in 2021.
