UK deals in the starting blocks: Are you ready?

After two years of low activity, we described the UK deals market in January as a coiled spring – the means and will to make deals was there, but the conditions were not yet right. As a new, growth-focused Government settles into Downing Street, will we see the stream turn into a torrent? While the picture is nuanced, the signs of life are certainly there.

On the face of it, the stats tell a different picture: for the first half of 2024, deal volumes were down 20% on the same period in 2023, with 1,703 deals compared with 2,126.

Deal values, though, increased by 66% to £68bn (up from £41bn in the first half of 2023). This bucks the global trend, which saw deal values increase by barely 5%, and is driven by some major deals in the consumer markets and financial services sectors (such as Nationwide’s £2.9bn offer for Virgin Money). While clearly still volatile, the signs are that the top-end of the deals market is beginning to return, with investors’ confidence growing.

On the ground, too, we have seen a shift. Activity levels have begun to pick up in recent weeks, with a lot of interest around artificial intelligence (AI), net zero energy transition, infrastructure and construction, and (albeit in a bumpy way) healthcare. Conversations are being had and plans are being made. Corporates and private equity are desperate to transact – the only thing holding many deals back has been the desire to wait for the conditions to be right.

UK deal volumes and values, 2019–2024

Investment looking for a home

Corporates dominate transaction activity; they have funds to invest and the right transactions are an essential strategy in their race to transform and grow. On top of that, private equity (PE) wants – and needs – to get moving. PE was involved in just 37% of UK deals by volume (compared to 41% last year) and 46% by value (against 52% last year).

There are compelling arguments to suggest that PE activity is about to boom. According to the financial data company Pitchbook, at the beginning of 2024 more than half of the 27,000 portfolio companies held globally by PE firms had been on their books for at least four years. Many of them are still there six months later; in other words, these investments are outstaying their welcome. Investors want returns, and PE firms know that raising new capital will be much more difficult if they fail to make distributions from existing investments. It’s essential that some of these portfolio companies are sent on their way.

Investors’ eyes are on the UK

The General Election is a significant milestone. Dealmakers had already priced in a change of government and the early Election works to the UK’s advantage by removing uncertainty from the equation, at a time when much of Europe and the US is in political turmoil. On top of that, the new Government’s plans depend on strong economic growth – and that means a business-friendly environment.

This all makes the UK a more attractive place to invest – along with an opportunity for investors to get in at the right point in the cycle – but there are a couple of provisos. The first is that many European funds are already relatively overweight on UK investments, which will limit their willingness to invest more. The second is that however powerful the desire to make a deal, achieving good returns on an investment will always be paramount. Many assets were bought at a premium during the Covid peak and have been sitting in portfolios ever since. Getting the right price is a priority, so dealmakers will wait for conditions to be right.

The last pieces of the puzzle

What are dealmakers waiting for? All eyes are on two key elements:

• Interest rates. The UK is lagging behind the European Central Bank, which has already begun to cut rates. Expect to see an increase in deal flow should the Bank of England follow suit.
• Political clarity. More detail is needed on the new Government’s plans, especially its industrial strategy, which should be laid out in its first Budget, likely to be held in the Autumn. Early signs are positive, with Ministers laying out plans for investment in health provision and infrastructure, and lifting barriers for house building and onshore wind.

This suggests that activity will accelerate after the summer, leaving dealmakers with only a few weeks to prepare for what’s ahead. So, what needs to be done?

Tell your story

When it comes to deals, well-run businesses with clear strategic purpose, in attractive sectors still sell quickly. Arcus Infrastructure Partners, for example, sold 100% of its investment in Constellation Cold Logistics to EQT in June, in a lightning-fast sale. Constellation has grown strongly around a buy-and-build growth model since Arcus first invested in the company in 2019, with expected revenues of around $150m this year.

That’s not to say companies that need work will be ignored – KKR’s $24bn acquisition of Telecom Italia’s network infrastructure is a good example of a deal driven by both need and potential.

As we have noted before, the current market constraints still lead to a critical need for two factors in deal-making:

• A compelling story. The narrative for growth and the future of the business – from a technological, competitive and net zero perspective – must be clear and compelling, with data to back it up.
• Value creation. The plan and strategy for building value and growing and future-proofing the business needs to be absolutely clear. This will require both strategic and operational capabilities working in tandem.

Sellers want to sell, but at the right price. Buyers want to buy, but when the conditions are right. As uncertainties in the UK resolve, pent-up demand will be released. The message for dealmakers is, prepare thoroughly for what’s to come. The race is on.