RG Corporate Finance is forecasting a shift in the Mergers & Acquisitions (M&A) market as a result of current economic headwinds, which will drive more management buy outs (MBOs) and ‘bolt on’ acquisitions for international corporates and UK based Private Equity backed businesses.
The Newcastle-based firm, which was recently listed in the Experian M&A league table as the second most active M&A advisory firm in the North East in the first half of 2022, also believes, based on its pipeline for the final quarter of the year and early 2023, that economically insulated sectors including tech, healthcare and professional services will remain highly active.
Carl Swansbury, Partner and Head of Corporate Finance at RGCF, said: “The market fluctuations driven by economic and political uncertainty will change the M&A landscape. In the short term macro-economic factors will result in businesses reassessing their plans, some of which will be positive.”
“While UK listed businesses may become less acquisitive due to a reduction in their market capitalisation and share price, largely caused by a softening in investor confidence, we believe there will be other opportunities, particularly when it comes to overseas listed businesses who may look to acquire UK based businesses to take advantage of the current strength of the USD vs GBP.”
Carl added: “As the economy contracts over the coming weeks, we suspect private equity investors will become more and more cautious, meaning private equity houses may be less likely to invest in new businesses and platforms over the coming months; they will, instead, likely be looking strategically to support their existing investments with making bolt-on acquisitions, which can further strengthen their investments’ market share and position.”
RGCF has recently experienced this, having advised on the sale of London based DMJ Recruitment to Fortes Group, which is an acquisitive platform in the professional services staffing space backed by Private Equity house, Omni Partners LLP.
Carl said: “Our knowledge of private equity house investments and the experience we have had advising on transactions they are involved in, enables our team to have a strong understanding of what they are looking for and how those bolt-ons can add value to their stable of assets.”
Another consequence of the likely reduction in the number of trade acquirers over the coming months is business owners looking for alternative exit strategies, which opens the doors for more management buy outs (“MBO”) and employee ownership trusts (“EOT”).
Carl explains: “Owners and shareholders are aware of the risk of future Capital Gains Tax increases and on the back of a challenging few years will understandably be assessing how and when they can sell their business to maximise the post-tax proceeds they receive. This has the potential to trigger more MBOs and EOTs from teams already in situ within their businesses.”
“There are still multiple funding options available for management teams considering an MBO, including debt from debt funds and high street banks, which, although more costly than we’ve experienced in the past few years due to the recent increases in the bank of England base rate, are still well below rates seen a decade ago.”
A very recent example of this was the debt funded MBO of North East-based PDQ Engineering, where the management team secured significant funding from NatWest to execute the MBO, which completed in September 2022.
He added: “The same can be said for those considering refinancing options, especially those on a variable interest rate. With so many other costs rising, being able to fix the cost of debt will bring some level of certainty.”
RGCF also anticipates continuing its trend of advising on transactions in its key market sectors that will be less impacted by fluctuations in the economy.
Sectors such as tech, where recently RGCF has advised on deals including the sale of Openview to iamproperty, and the acquisition of Market Dojo by Esker Inc, will remain active from an M&A perspective.
Carl added: “There will continue to be multiple transactions executed in sectors that are more likely to be insulated from economic contractions, which are sectors where we have been and continue to be highly active.”
He concluded: “We are fully aware of the economic headwinds facing businesses and have the experience and intimate market knowledge needed to help clients assess and ultimately execute on the most suitable options for their growth or exit strategies. We have had a highly active 2022 thus far and believe the final quarter of the year and into 2023 will remain strong as we advise a growing number of diverse, large and complex businesses on a range of M&A transactions and scale up strategies.”