Brabners Corporate and Deal Advisory teams have had an extremely busy start to 2021on the M & A front, completing over 50 deals during the first five months of the year with many deal values sitting in the £20 million to £60 million range.
The upturn in M&A activity (after a steady year in 2020 for our teams) shows clear signs of a broader recovery after the sharp dips experienced during national lockdowns one and two in 2020. Many economists predict a high growth year and a surge in corporate activity. So what are some of the private M&A market trends that we are seeing during 2021?
Increase in M & A activity in certain sectors
While there is no doubt that we have seen an increase in M & A activity, this is not happening across all sectors. Key sectors for activity seem to have occurred mostly in healthcare (digital), digital technology, pharmaceutical, real estate finance, financial services, renewables and natural resources… and caravan parks!
There has been extensive investment from companies and management teams in digitisation and remote working. We have seen numerous acquisitions and restructures implemented to improve supply chain issues, stabilize businesses and prepare for growth. Innovation and adaptability has been a key driver and an area in which we expect to see further significant activity as companies are compelled to improve operational and distribution efficiency.
The Capital Gains Tax changes which were expected in the April budget but which did not materialise may be resurrected in the Autumn budget, prompting further M & A activity.
Due diligence and valuations
Many transactions are staying in the due diligence phase for longer. It is plausible that this has been caused by extensive and enhanced financial, legal and commercial due diligence in COVID-19 related areas and delays caused by valuations. The general perception is that many boards are still in a “wait and see” phase, exercising caution when it comes to committing to large acquisitions, unless it is a solid opportunity. Getting valuations right will be key, but we could see a bumpy year ahead.
Having said this, there is a lot of deal flexibility and more innovative and creative deal structures being implemented to get deals over the line and to ensure that neither the buyer nor the seller takes on the full impact of COVID-19.
Cross-border transactions and international buyers
Cross-border transactions have been particularly buoyant and we have seen increased interest from international buyers. The reasons for this are two-fold. Firstly, the end of the Brexit transition period has presented new opportunities for international acquirers. Brexit does not appear to have thwarted UK M & A activity with UK assets remaining highly attractive to overseas buyers. Secondly, we have acted for many international organisations head-quartered in Europe wishing to gain a foothold in the UK due to regulatory changes, increased customs and excise tariffs and supply chain and distribution issues. We are seeing this interest boosted by the Freeports proposals across the North of England.
Increased investment from private equity and venture capital funds after period of consolidation of existing portfolios
During 2020, we saw private equity houses and venture capital funds turn to consolidate their existing portfolios and “keep their powder dry” on any new investments. In recent months, we have seen investment activity from PE and VC increase substantially. Private equity houses are becoming more active again supporting strong management teams either in new sectors (medtech, digital and the “knowledge” sectors) or those sectors that have shown resilience amidst COVID-19. As expected, there is now substantial liquidity in private equity which will be pivotal to our economic recovery. We have also seen interest from private equity and family office funds looking for opportunities to invest in the northern regions and make use of the wealth of experience in acquisition support in the North West, such as our own.
There are many benefits to selling to, or accepting investment into your business from a private equity house, including the ability to obtain finance from multiple sources (i.e. equity and debt), the opportunity for the business owner to realise some equity value by taking some funds out (thereby de-risking) and the ability to incentivise a new tier of management and so create options for growth coupled with succession and final exit.
The vast majority of corporates (particularly micro companies and SMEs) will have made use of the government backed CBILS loans and bounce-back loans offered by government accredited institutions during 2020 / 2021 and benefited from the minimum 12 month repayment break. Once repayments are due, it may be difficult for many of these companies to find additional debt finance or to refinance and so equity investment may be the only alternative. There will be an even greater need for debt and equity providers to collaborate and work together going forward.
Expect to see more exits and disposals
There is no question that the COVID-19 pandemic and multiple lockdowns have impacted businesses and communities globally. As a result, the priorities of business owners have changed with many looking at a range of options to realise value from their businesses. Competition for good assets and increased valuation multiples in certain sectors make selling an attractive option for shareholders. Whatever their motivation, selling shareholders have been looking at various options to exit, most commonly including sale to a trade buyer, sale to a management team (MBO) and sale to an Employee Ownership Trust. During 2020/2021, we witnessed business owners in certain sectors who were eager to sell, looking at alternative exit options such as management buy-outs, management buy-ins (MBI) and EOTs more closely, where a trade sale route was not available. Many business owners struggled to secure a trade sale during this period, largely due to change of government, Brexit supply issues and COVID-19. We have seen a steady flow of MBI candidates looking to acquire businesses.
Increase in distressed M & A activity?
There has been plenty of press coverage surrounding expectations of increased distressed M & A and insolvencies on the horizon. In fact, we saw less than expected. Corporates that were distressed seemed to have fallen away already. Strong companies have continued to consolidate or grow. It is likely that we will see many companies being stretched and challenged significantly from a working capital perspective once loan repayments are due and it will be interesting to see to what extent this results in distressed M&A activity. The end of furlough and 12 month capital repayments is soon due and this is bound to have an impact on businesses. There may also be a shake out of certain business models as a result of changes in working practices arising through the pandemic. This may result in both distress amongst some existing businesses and also some new disruptive business models coming to the market. Supply chain disruption and inflation and capacity restrictions globally are squeezing margins for many companies and this cannot be overlooked.
Sustainability and reaching net zero
With a declared climate emergency, sustainability and reaching carbon net zero is a priority for many management teams. Those companies that do focus on Environmental, Social and Governance (ESG) are becoming more attractive investments to institutional investors and we are seeing increased activity in this space. For larger companies and PLCs, the introduction of further legislative requirements and legal obligations of directors to justify their decisions with this in mind will no doubt be a key driver in future corporate activity. We are seeing corporates and shareholders focus more on long-term environmental and social economic sustainability. There is no doubt that many executive teams are under pressure to deliver short-term successes and value to shareholders and other investors which makes sustainable corporate governance a real challenge.
Recruitment and retention of talent
Professional advisers and management teams alike have reported that recruitment and retention of talent has proven a challenge during 2020 and 2021. A shortage of talent means it is more difficult to provide high levels of service to clients and customers, driving salaries upwards as employers are feeling the need to pay more for good people.
If you have any queries relating to M&A activity, contact Jennifer Gallagher or your normal contact in Brabners Corporate and Deal Advisory teams, who will be happy to help.
