Increasing inflation and interest rates attract overseas investors to the UK

Ryecroft Glenton Corporate Finance (RGCF) believes that despite the many macroeconomic challenges, there is also room for cautious optimism.

The North East-based advisory firm has said that despite the unpredictable and unprecedented challenges faced by businesses caused by the Covid-19 pandemic, the war in Ukraine and now the energy and cost-of-living crisis, the economy remains buoyant.

Inflation has increased dramatically, which has fundamentally impacted the cost of raw materials along with wages, combined with increasing energy costs, which has meant that the profitability of most businesses has been negatively impacted, unless these costs can be passed onto an end client, often the consumer.

However, things are looking up as demonstrated by the recent news that the economy grew by 0.3 per cent in January 2023. Inflation though is still very much a problem as demonstrated by the surprise increase in February. Whether this is a temporary blip is the key question.

Businesses are still having to deal with increased interest rates, which means businesses with debt are paying more to service that debt, but this should be seen in the context that interest rates at 4% are still at relatively low levels compared to where interest rates were in 2007.

Carl Swansbury, partner and head of corporate finance at RGCF commented: “The increase in interest rates, coupled with inflation, has led to a “perfect storm”. Whilst these factors combined have contributed to significant challenges, which in turn are inducing caution and encouraging private equity investors to be more cautious, the weakening £ against currencies such as the $ makes UK companies more attractive to overseas investors and buyers.

“With the recent announcement that the UK economy rebounded by 0.3 per cent in January, which is much faster than expected, coupled with the lowering of the value of the pound against currencies such as the USD, this has enhanced interest in UK businesses from international acquirers and investors, as experienced in the significant increase in the number of cross border transactions we have advised on over recent months, including French listed Esker’s acquisition of Bristol based Market DoJo, Italian based Gi Group’s acquisition of Midlands based Encore and Swedish listed LIFCO’s acquisition of Newcastle based SAS. The UK is still a very strong economy and so overseas trade buyers continue to look to the UK, which has strength in certain sectors such as technology, manufacturing and engineering.”

RGCF has extensive experience of working with international companies who are looking to make strategic acquisitions in the UK, whilst also advising shareholders of UK based privately owned businesses on the sale of their companies to overseas trade buyers and financial investors, as was the case when RGCF advised the shareholders of Bristol based e-procurement Software as a Service (SasS) provider, Market DoJo on the sale of a 50.1% shareholding of the business to French listed Esker.

Carl stressed the importance of context, as while interest rates have risen to 4%, they are still relatively low in comparison to where interest rates were around 20 years ago, which means debt is still a viable form of funding to consider when looking to fund an acquisition or MBO, especially at a time where there is increased caution within the private equity arena.

Carl said: “Current interest rates in comparison to the 20% we saw in the 1970s are low and so debt is still relatively cheap, certainly in comparison to equity. There remains a lot of liquidity in the market and therefore there are many funding options available for those high-growth, ambitious businesses which are looking to grow and make acquisitions.

“The current market presents many opportunities and fortune always favours the brave. A common misconception is that banks are not lending but NatWest recently provided a seven-figure funding package to support the MBO of North East-based precision engineering company, PDQ Engineering Ltd, which is a transaction RGCF advised on and would perhaps suggest otherwise.”

Despite the mood music being negative, businesses in certain sectors such as technology, professional services and healthcare are performing very well and are likely to continue to do so through a recession.

Sectors such as hospitality, travel and tourism, and any other sectors which rely on consumer spending are likely to be negatively impacted. With price increases being passed through the supply chain and onto consumers, which is reflected on supermarket shelves, consumers have less disposable income meaning they spend less which will ultimately lead to a recession in the next few months.

Also, among the challenges facing businesses are recruitment issues, which have been highlighted by RG client, Nigel Wright Group (NWG), in new research undertaken by the recruitment specialist. NWG’s research highlights that key issues range from staff retention and recruitment, finding that 94 per cent of employers are finding it difficult to recruit.

NWG also discovered that wage increases have been lower than reported, with an average of between 4 – 6 per cent and only 3 per cent of employers have given pay rises above inflation.

Carl said: “This study has demonstrated that investment in skills is vital, and instead of a business seeking a quick fix, they should develop and train new talent.

“What people need to consider before they vote with their feet is that many employers will want to give their staff a pay increase, but they may not have large enough profit margins to maintain such pay rises long term.”

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