Given the rise in interest rates and inflation, and the global slowdown in deals activity in recent months, it’s no surprise that both deal volumes and values fell in the UK in the first half of this year. Our data reveals deal volumes are down by 21% compared to H1 2022, while deal values fell by 55%.
Some sectors have seen less activity than others. Retail and consumer goods have been impacted due to concerns about the impact of inflation and interest rates on disposable income, while real estate has seen reduced activity due to worries about asset valuation and the long-term implications of hybrid working.
But the general trend of decreased activity is primarily driven by a reduction in megadeals; while the number of transactions is holding up, the average deal size is significantly smaller. This is partly due to large Private Equity (PE) deals being put on hold temporarily as vendors wait for more stable conditions before exiting. However, some sections of the market are holding up well.
Cash-rich corporates and PE are actively seeking strategic transformation and growth opportunities in the mid-market segment. Lucy Stapleton, UK head of deals at PwC UK, says: “There is pent-up demand among dealmakers who remain poised to deploy capital when market conditions begin to stabilise and valuation gaps narrow. The mid-market is continuing to hold up as cash-rich corporates look for strategic opportunities and we may see more bolt-on transactions as well as sell-sides as private equity and corporates start to prepare to exit businesses.”
“There is pent-up demand among dealmakers who remain poised to deploy capital when market conditions begin to stabilise and valuation gaps narrow.”
Lucy Stapleton, UK head of deals at PwC UK
In a volatile market, investors are showing more confidence when it comes to deals that address the ‘big picture’ trends. Tim Allen, deals industries and international leader at PwC UK, says: “M&A activity within the industries has been driven by opportunities linked to addressable market trends such as demographic change, technology advancement with the growth of generative Artificial Intelligence (AI) and energy transition. This is evident from some of the deals we have seen involving fibre network investment in infrastructure and AI investment in the healthcare sector.”
“M&A activity within the industries has been driven by opportunities linked to addressable market trends such as demographic change, technology advancement with the growth of generative Artificial Intelligence (AI) and energy transition.”
Tim Allen, deals industries and international leader at PwC UK
Confidence is critical in dealmaking, and many investment committees are reluctant to commit. This isn’t entirely down to economic conditions and financing pressure – generative AI is also playing its part. The rapid development of this technology and its disruptive impact on business models make it exceedingly difficult for investment committees to predict which portfolio companies will retain their value in the next five years.
Caution may abound but that doesn’t mean that the current downturn in deal volumes will last. There are many positive signs, not least the amount of capital held by PE. Many dealmakers are waiting for the right time and opportunity as valuations fall, and capital will start flowing again before too long. But that’s not to say that the market will look the same as before. We expect to see the following developments in the coming months:
This is no doubt a challenging market, but we remain optimistic that the coming months will see new opportunities for those that have prepared well. The days of riding valuation multiples are over – and that means putting value creation at the heart of every deal.
Transactions Services, Energy, Utilities Mining & Infrastructure Leader, PwC United Kingdom
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