Recent research from Pitchbook reveals that UK private equity is building strong momentum in 2024, with a notable surge in deal value that highlights significant year-over-year growth. As we mentioned in an earlier article, Q2 witnessed the highest deal value in two years, and Leveraged Buyout (LBO) megadeals increased considerably. Interestingly, the UK has been a major player in the take-private deals, accounting for half of Europe's activity in H1.
Fundraising in the PE sector is on pace for a record year with £29.3 billion secured in H1. However, the trend of growth funds losing share to buyout funds continues, and the time taken to close funds is rising. The UK PE market presents a mixed bag of challenges and opportunities.
PE deals activity
According to Pitchbook the six most significant deals in H1 2024 all happened in Q2, with LBO megadeals witnessing a considerable increase, contrary to growth/expansion deals facing pressure due to high-interest rates. Despite higher borrowing costs, the first half recorded strong buyout activity even before the Bank of England's recent interest rate cut.
UK tech deals rising
KPMG UK's latest M&A study revealed mid-market private equity investment activity in the UK declined by 11% in the first half of 2024.The IT sector in the UK is set for a banner year in private equity deal activity, claiming 29.4% of deal value in H1, the highest since 2016. Notably, software companies including Darktrace, Jagex, IQGeo have attracted major deals. This sector, which experienced valuation volatility with rising interest rates, is poised to gain significantly from falling rates. Often identified as high-margin businesses with predictable revenues and low capital costs, software companies are becoming central to investment strategies of certain firms, proving especially convenient for integration as add-ons to platform companies.
Cleantech and climate tech PE deal activity
Cleantech, a priority for the new government
The energy sector expects year on year growth in both deal value and count, driven by robust cleantech deal activity. In H1, 20 deals worth £2.8bn were recorded, a trend that is expected to persist. The UK government's National Wealth Fund, deploying billions towards giga factories, clean steel, and carbon capture, will invite more private sponsors and boost the sector. The government's pledge to make the UK a "clean energy superpower" predicts increased deal flow in the future.
Financial services still the beating heart of the UK
The financial services sector has seen a surge in activity,
notably strong in Q2 with 49 deals and £5.1bn deal value. Despite Brexit, London
remains Europe's financial heart, hosting major institutions from
investment banks to fintech firms. Rise in interest rates over the past two
years has posed challenges for some companies but also opened up dealmaking
opportunities.
Our 2023 UK Private Capital Breakdown highlights continued growth in UK financial firms. Concerns were raised about post-Brexit threat to UK's Private Equity and a potential shift towards France, Europe's second-largest market. However, data shows UK's deal value not only grew but also broadened its lead over France. As the UK government considers taxing carried interest as income, it raises questions about potential moves out of the UK. Developments regarding this new possible policy will be tracked and reported post the Autumn Budget announcement by incumbent chancellor, Rachel Reeves, on 30 October 2024.
PE Fundraising activity
Astonishingly, 2022 and 2023 witnessed robust PE fundraising performance in the UK, despite global capital contraction due to stricter monetary policies. Now, with the Bank of England slashing interest rates, 2024 is set for a record-breaking year of capital accumulation by UK funds. In H1 alone, £29.3 billion were raised, nearly two-thirds of which were attributed to two mega funds: Cinven's eighth flagship fund (£11.4 billion) and Apax's 11th flagship fund (£9.4 billion).
As traditional buyout funds encompassed 91% of H1-raised capital, growth funds have seen a decline in share since 2021, aligning with the onset of monetary tightening. Increasingly, emerging firms are raising funds, with the proportion rising from 33.3% in 2023 to 46.2% in H1 2024. This rising share exhibits an optimistic sentiment towards the UK PE industry. Nonetheless, the sector has its challenges, with the number of new funds dropping since the peak in 2021 and the median time to close funds increasing from nine months in 2020 to 21 months in H1 2024.
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16/09/24
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