“CONFIDENCE IS KEY IN THE NEW YEAR”

2022 saw an uncertain time for M&A and business investment. As businesses prepared for a looming recession, so too did buyers and investors. Inflation, soaring interest rates, and a recession put an end to the buying spree that followed Covid-19 lockdowns. Economic strain made buyers and investors more cautious about where they were putting their money. Despite this, M&A and investment experts remain positive about what’s in store for 2023. We spoke to leading experts to find out what they think will be significant trends in M&A and investment in the coming year…

M&A

WHAT DID WE SEE IN 2022?

M&A activity in 2022 was close to historical averages. In spite of this, the M&A market had cooled considerably from the previous year – through the first seven months of 2022, deal volume had fallen 13% compared with the same time in 2021, while deal value fell by 32%.

A major event that determined the rate and volume of deals slowing towards the end of last year was the fleeting government led by Liz Truss, and its chaotic Autumn Statement.

Matt Eves, Head of M&A South at EY, feels the deals put on hold as a result of the budget are likely to take place in 2023 – potentially causing a boom in M&A deals this year. He comments: “Particularly after Liz Truss’ Autumn Budget and increased interest rates, the market became much tougher to get transactions delivered because the cost of funding went up for people. After Truss’ short-lived government, quite a few deals ended up being put on hold until this year. I’m expecting to see the stronger, more-resilient businesses that have been put on hold due to an uncertain environment come to market and be transacted.”

Andrew Charnley, Managing Director at Assetz Capital, believes the Truss government also drastically impacted international confidence in UK firms at the time. He comments: “From a macrolens, there has been a slowdown of M&A activity in the second half of the year. The ‘Trussonomics’ mini-budget impacted the last part of the year and overseas confidence in UK PLC. Business owners are looking for value and I think that will drive activity throughout 2023.”

WHAT TRENDS MIGHT WE SEE IN 2023?

The Bank of England raised interest rates to 3.5% in December 2022 – the highest it had been in 14 years. This was the ninth time in a row last year that interest rates were increased to tackle soaring inflation, currently at a historically high 10.7%.

Increased interest rates impact everything from mortgages to loans, credit cards, and savings. In the M&A space, how buyers fund their deals has been markedly impacted and is likely to continue into 2023.

Eves continues: “Businesses that have enjoyed funding themselves on very low levels of interest rates now can’t, therefore when a business comes up for refinancing in 2023/2024, their funds are going to cost a lot more. It impacts their cost of doing business, just in terms of their underlying debt service, but it also impacts their ability to invest, and they’re probably less likely to make acquisitions. That being said, this gives potential investors who are sat on cash quite attractive opportunities.”

Charnley feels there may be an increase in businesses seeking funding from alternative funders as a result of the economic situation. He says: “I think high street lenders will be much more conservative in 2023 and that gives opportunities for alternative lenders. I also think overall lending could be subdued as risk appetite tightens across multiple sectors, but I think that also gives the opportunity for highnet-worth individuals, pension funds and potentially overseas investors looking to deploy capital into the UK.”

Despite appetite tightening across sectors, experts expect international interest in UK business to strengthen, continuing from last year. Simon Glover, Senior Manager at BCMS, believes the weakening sterling has had a part to play.

Eves says some of the macroeconomic factors we are currently witnessing will drive dealmaking niches. He comments: “There are interesting macroeconomic factors that are coming into place. I foresee a large amount of activity in anything that has an ESG angle. The environmental space is going to be a very circular economy and it’s going to be a very strong market in my opinion. There will continue to be an appetite for business-critical software, digital transformation businesses, healthcare and life sciences.”

“It’s very hard to get transactions completed in the consumer space because the pressures on the consumer’s wallet have become evident. Inflation, the cost of debt, and the cost of mortgages are making it hard to transact consumer businesses. Also, any business with high energy intensity may experience a decline in deals because of a spike in energy prices – people are less likely to invest because they don’t know what you have to pay for your costs.”

Indeed, soaring energy prices will have an impact on which businesses are likely to receive interest. Glover comments: “Rising energy prices around the world will lead to higher demand for companies offering products and/or services which reduce energy consumption. While tighter labour markets will spur appetite for businesses active in Human Capital Management.”

WHAT CAN BUSINESS OWNERS DO? REMAIN CONFIDENT

Caution became a common feeling in the M&A and funding space last year and while inflation rose, business confidence took a dive. As a result, many experts have highlighted the importance of confidence going into the new year.

He says: “As ever, US buyers are leading the charge, but buyers from European countries including Germany, France and Switzerland have also been very active. Doubtless, this increased M&A activity from overseas will have been driven in no small part by the weakness of sterling during 2022, which made UK assets much cheaper for international buyers.”

Consumer-facing firms will struggle while ESG businesses will boom Inflationary pressures and the cost-of-living crisis continue to strain consumer-facing businesses and energy-intensive firms. Despite this, experts see a boom in a variety of established and emerging industries.

Eves says: “I think it’s just about expectations. If you’ve been wanting to sell your business in the last 12 months, you’ve been hearing about all the crazy prices that your friends down the road at the golf club have been getting. Then it becomes hard for you to think that your business is suddenly worth 20%/30% less – just because the world outside has changed but your business hasn’t. Buyers can’t pay what they were going to pay before because it’s not costing them 2% to borrow money, it’s costing them 7% to borrow. Businesses need confidence.”

Charnley comments: “Consumer confidence translates into business confidence. Also, political stability and a settling down of the interest rate environment will hopefully lead to a falling inflationary environment by the time we get into summer, and this may boost confidence.”

Another area is rising debt and servicing costs. A lot of businesses have borrowed extensively from 2008. The financial crash of low-interest rates and levels of quantitative easing have been on a level that nobody could have forecast. That is well and truly over now. Whilst there was a movement panic off the back of Truss’ mini-budget, I think that cycle was always going to happen.”

Glover comments: “At the broadest level, M&A activity is directly linked to boardroom confidence; where this is low, it is a safer call for a potential acquirer to retain the cash on their Balance Sheet. But we are seeing that in spite of the multiple adverse factors at play during 2022 - rising interest rates, volatile public markets, double-digit inflation and geopolitical instability, to name just a few – there is an unrelenting appetite for high-quality UK businesses.”

Fundraising And Investment

Like the M&A space, inflation, high-interest rates and political instability impacted business funding and investment last year. According to the Office for National Statistics, business investment fell 2.5% in the UK in the third quarter of 2022, more than its initial estimation of 0.5% – but will investors remain cautious in 2023?

WHAT TRENDS DID WE SEE IN 2022?

Julia Elliott Brown, investment expert and Founder of Enter The Arena, comments: “After a very buoyant end to 2021 following the pandemic, 2022 has seen a very significant drop of 24% in the number of venture deals done in the UK, with the amount of capital invested plummeting by 52% in the last 12 months. The current economic climate is undoubtably taking its toll. In challenging times, investors often hold back, double down on their existing portfolio of investments, take less risks on early-stage businesses, and tend to back founders and industries that they feel most familiar with.”

Kerry Sharp, Director of Entrepreneurship and Investment at Scottish Enterprise, comments: “In addition, there has been a fall away in the number of large £100m+ deals that we saw in 2020 and 2021 in the UK, especially in London and surrounding regions. Our data is showing that deals are taking longer to agree, the terms are harsher, and full amounts sought are not always being raised. We are also seeing a greater reliance on existing investors, making it harder for companies at earlier and higher risk stages. These are challenges we are hearing reported across the UK and not unique to our experience in Scotland.”

WHAT TRENDS MIGHT WE SEE IN 2023?

Elliott Brown feels that those businesses solving a problem will shine in the new year. She comments: “The turbulent financial environment looks set to be a continuing theme for the year ahead. It won’t be easy for early-stage start-ups to get funded. It will be more challenging for D2C businesses, as investors shy away from e-commerce and other consumer-focused sectors which are more likely to be impacted by the cost-ofliving crisis. But those businesses that are solving long-term pressing problems in the world, shaking up industries, and making real innovations will still be of interest to investors, especially those who are looking for a return over the medium- and long-term.”

Ewa Chronowska, VC investor and CEO at Vestbee, comments: “No doubt the biggest winner will be AI, which will become increasingly integrated into businesses of all kinds. Due to the numerous fraudulent activities and blow-ups, crypto and web3 will suffer the most in 2023 as it will take a considerable amount of time for the community to re-establish trust. I expect some heavy regulations to be imposed onto crypto.”

Overcautiousness And Hyperuncertainty

Chronowska highlights the impact of economic pressure on investor confidence. She comments: “After the record-breaking 2021, the pace of venture investment and late-stage tech valuations have been declining throughout most of 2022. However, early-stage investment activity is still solid while waiting for public market turbulence to settle down. Against this backdrop, investors urged portfolio companies to reduce cash burn and seek other ways to extend their runway by cutting expenses, e.g., overheads.

“Nevertheless, VC firms have accumulated record levels of dry powder and will be overcautious with its deployment until the hyper uncertainty disappears from the markets. As a result, we should expect a moderate cool down at early stages, more reasonable valuations, proper deal diligence and decreased deal velocity. Although macro remains volatile, VCs will still invest in earlystage companies, just at a reduced pace.”

Sharp comments: “The impact of the economic downturn on investment is already with us - while equity investors are patient and take a long-term perspective, it is clear that VC and corporate investors, globally, are now responding to changing macro-economic conditions.

“Even though there is restraint at play, investors are continuing to focus their attention on companies operating in new and growing sectors, such as net zero, renewables and health technologies, where changing market conditions and consumer demand creates opportunities and the prospect of strong international growth.”

HOW CAN BUSINESSES CONTINUE TO ACHIEVE INVESTMENT IN THE NEW YEAR? Elliott Brown feels that exercising your pitching muscles is important now more than ever. She comments: “Empowering yourself with the skills to perform at your very best on all these elements will help you cut through, along with having the right professional support along the journey. Raising investment is like climbing Everest. You wouldn’t attempt it without training and preparation in advance, a well-thoughtthrough strategy and plan on how you’re going to attempt the expedition, or an experienced sherpa to guide you to the peak.”

While Charnley raises the importance of businesses not steering away from what they do best during an economic crisis. He comments: “It’s important for businesses to stick to what they’re good at and not break into new markets or explore what is outside of their expertise. All of this is underpinned by confidence levels. Confidence is key in the new year. I think it’s easy for people to be downbeat now. That’s what’s very different from the crash in 2008. Some businesses will fail, but those with great service, a USP and are good at managing their supply chain will succeed.” 