M&A and debt market looking set to buzz again

THE South West’s mergers and acquisitions (M&A) landscape continues to see interesting twists and turns. From the perspective of lenders and buyers, 2022 was a rollercoaster, starting out buoyant and continuing the previous year’s significant level of deals activity.

For context, 2021 saw a record number of transactions executed by Grant Thornton’s deals teams.

That came on the back of a substantial amount of dry powder in the market across corporates, private equity and lenders, combined with a pent-up demand to complete deals delayed throughout the pandemic.

This trend continued unabated until summer 2022, when welldocumented shocks to the market caused a slow down.

This has created the current situation, where there’s still a substantial appetite but buyers and lenders are being more sensitive to the economic outlook and cautious in their approach.

Lenders are increasingly triaging deals at an earlier stage along sector lines, leading to some dropping out earlier in the process and being more selective with the sectors they are willing to invest in.

That said, banks and funds have more capital now than ever before, with the banks being better capitalised and debt funds raising large pots of capital to deploy.

This means that, despite the prevailing economic headwinds, there is a long list of sectors that remain fertile grounds for M&A activity.

Tech, healthcare and business services to name a few are all proving robust spaces to do deals.

Appetite for deals in certain sectors can be more dependent on the niche activity of the business in question.

Businesses in the consumer, retail, leisure, and recruitment sectors for example may find fundraises more challenging, but by carefully selecting lenders and/or buyers who know the sectors well, and who can look through to the end markets, there are still attractive deals to be done.

How is this likely to pan out in 2023? As mentioned, there is still a lot of capital out there and it’s important to observe how it is being deployed.

Many private equity firms have successfully raised large funds and are increasingly competing for specific assets.

They may start looking at options in different areas to avoid a high level of competition and to acquire businesses at a lower price point.

Similarly, trade buyers are currently sitting on cash and are being opportunistic when they spot owner-managed businesses that are looking for an exit and a way to smooth over inflationary and recessionary pressures.

When it comes to specific sectors, Bristol’s growing tech market remains one to watch, with a lot of dynamic and innovative businesses looking to scale up and increasingly compete with the typical dominance of the South East and Thames Valley regions.

Food and beverage, agriculture and healthcare, in particular elderly care and specialist care providers, remain key parts of the South West’s market and the need for their services will continue to grow.

For those businesses in the more at-risk sectors, they may have an easier start to the year than many expect – as inflationary pressures on consumers are taking longer to bite than initially expected.

The major household expense for homeowners is typically their mortgage and with the average mortgage being a 2-3 year fix, the impact of the increasing bank base rate will take 24-36 months to filter through.

When paired with the fact that the government is supporting households in the immediate future with the cost of energy crisis, there will likely be a lag before the true impacts are felt at a macroeconomic level.

While the South West largely follows the national trends, it has been notable for the number of smaller deals over the past year, with a particular emphasis on trade buyers but also significant pockets of PE activity.

❝ Despite the prevailing economic headwinds, there is a long list of sectors that remain fertile grounds for M&A activity. Tech, healthcare and business services to name a few are all proving robust adam.h.hughes@uk.gt.com

It’s likely that we’ll also see PE funds in the area expand their horizons and start looking at options they may have not considered six to 12 months ago.

All together the pipeline for 2023 looks promising. While thinking about the debt markets, leverage has come down and pricing has increased, and so lenders are keeping an open mind.

They still want to do deals with the right business.

The key to success will be in presenting lenders with the right business plan in the right way from the outset.

Working with advisors who understand the debt and equity markets, as well as the pressures that lenders and buyers are facing and how they are looking at credit risk and forecast business plans, will help business leaders navigate today’s deal pathway.

Understanding these factors is crucial to ensuring that a business is presented in a way that will engage the most people and generate the most interest.