2020 a story of two halves for UK's private equity deal market

01 February 2021 Consultancy.uk 5 min. read

Deal activity in UK’s private equity sector hit its lowest point in more than seven years in 2020 amid the Covid-19-induced downturn, according to a new KPMG report. However, on a positive note, M&A activity bounced back strongly in the second half of 2020 and is set to continue its recovery in the coming twelve months.

A total of 889 deals completed over the course of 2020, with a combined value of £87.2 billion, down 26% on the previous year, which saw 1,200 deals with a total deal value of £107.7 billion. According to KPMG’s records, 2020’s deal volume is the lowest since the 2008 global financial crisis and its aftermath.

Both deal volume and value took a particular big hit in the initial months of the Covid-19 pandemic. “Covid-19 was the catalyst behind the dramatic collapse in deal activity saw in the spring. It’s no surprise that deal levels plummeted in Q2 as vendors and purchasers retreated from the market, protected their businesses and reviewed their portfolios,” said Jonathan Boyers, head of M&A for KPMG in the UK.

Annual UK PE deal volumes and values

The analysis shows that private equity deals in the mid-market (with an enterprise value/deal value between £10 million and £300 million) have been harder hit than the market as a whole. There was a 35% decline in deal values on 2019, to £28.45 billion, and a 33% decline in deal volumes, with 452 transactions completing.

On the rebound

On a bright note, Boyers said that there was a clear bounce-back in activity in merger & acquisition activity by financial investors in the second half of 2020. As companies adapted to the ‘new normal’, dealmakers realised deals could still be done, albeit virtually.

As a result, deals that had been put on hold sprung back to life, and private equity investors, still sitting on substantial reserves of capital, mobilised once more, resulting in over two hundred transactions completing in each of the final two quarters. 

Annual UK mid-market PE deal volumes and values

“Once the initial shock of lockdown had worn off, and hesitancy caused by issues such as Brexit, general elections and broader international uncertainty, we saw a renewed urgency amongst private equity investors to get deals done. They had plenty of cash ready to be deployed, and with a similar appetite for transactions in the debt markets, it wasn’t long before the M&A tap was turned back on,” said Boyers. 

Foreign investors

Seeking to capitalise on uncertainty among UK private equity firms, foreign players increased their foothold in 2020. North American private equity firms increased their share to more than 20% of deals for the first time in the past four years. It was a similar story for Asian and rest-of-world investors, which both saw an increased level of activity in the UK.

“Granted, these increases come against a background of a decrease in overall UK M&A in 2020, but the resilience is worth noting,” explained Boyers. Meanwhile, investment from European sources fell to its lowest level since 2017, suggesting that players most exposed to Brexit are feeling the brunt.

% split of UK M&A deal volume by investor geography

Deals by sector

All sectors saw a significant decrease in the number of mid-market private equity deals completed in 2020, in line with the overall decline in deal activity. Industrials was by some margin the biggest faller, with 54% fewer deals than in 2019. This is most attributable to the short-term effects of the pandemic on operations and, consequently, business revenues, plus lingering concern over the possibility of a ‘hard’ Brexit and the potential impact on distribution channels and supply chains.

Energy and Business Services saw the next largest declines, at 38% and 36% respectively, after both sectors had seen record levels of deal activity in 2019. Consumer goods fell by a similar amount, recording a 34% reduction in deals.

Healthcare saw its deal share increase from 7% to 9% of total deals. Boyers: “This is testament not only to the long-term socio-economic fundamentals that underpin the attractiveness of the sector to investors, but also the opportunities within the sector underlined by the pandemic.” 

Full year UK mid-market PE deal volumes by sector

Similarly, the switch to virtual and remote working turbocharged the growth of M&A in the TMT sector. Putting this into context, five years ago, TMT accounted for around 12% of mid-market private equity deals. In 2020 it accounted for almost one-quarter. 

Outlook for 2021 and beyond

Commenting on the outlook for 2021, Boyers said: “We’re certainly not seeing any signs that the latest lockdown is quelling momentum. Rather, there seems to be a mindset that nobody wants 2021 to be another ‘lost year’ after such a prolonged period of economic and geo-political uncertainty.”

“The fundamentals that underpin the private equity market remain strong. There are enormous amounts of dry powder available. Debt markets continue to be supportive in terms of both leverage and cost of financing. Business owners who have been waiting for a few years now for the perfect opportunity to bring in investment or sell, and who may be mindful of an imminent increase to capital gains tax, are now keen to push the button.”

Investors are expected to continue to flock to those sectors which showed resilience and even growth throughout the pandemic.