UK M&A activity slowed during 2023 as higher borrowing costs, increased corporation tax and geopolitical uncertainty affected business confidence and transaction financing.
Across Polestar Corporate Finance’s five core sectors, the number of transactions involving a UK party declined by 14%, from 3,731 in 2022 to 3,207 in 2023.
Polestar CF’s 2023/2024 UK M&A Review and Outlook examines the economic and investment trends affecting UK dealmaking, followed by individual analysis of Software, Media & Technology; Business Services; Sustainability; Manufacturing & Distribution; and Health & Education.
The UK economy performed better than expected during 2023.
House prices declined by 1.8%, compared with a forecast reduction of 8%, while GDP grew by approximately 0.5% rather than contracting by the anticipated 1%.
Economic growth was concentrated in the first half of the year. GDP fell by 0.1% in the third quarter and 0.3% in the fourth quarter.
Headline inflation declined from 11.1% in October 2022 to 4% in December 2023. Core inflation remained at 5.1%, reflecting a tight labour market, services inflation and businesses passing higher costs to customers.
The economic outlook remained exposed to:
The Bank of England expected inflation to reach its 2% target briefly during the second quarter of 2024 before rising to 2.8% in the first quarter of 2025. Significant interest-rate reductions were not expected before 2025.
Labour shortages and the high cost of employment increased interest in artificial intelligence and automation.
Generative AI attracted significant attention following the launch of ChatGPT in November 2022. Its rapid development created opportunities to improve efficiency and develop new products.
It also raised unresolved questions around:
Larger companies, private equity-backed businesses and specialist firms with suitable data were expected to lead early adoption.
Investing too early carried the risk of an existing system being overtaken by a newer or less expensive solution.
However, delaying investment could also allow competitors or substitute products to gain an advantage.
For smaller companies, immediate priorities included preparing infrastructure, IT-service management and cybersecurity for future automation.
The Internet of Things connects devices and enables them to communicate with cloud-based technology.
Connected systems can:
The quality of training data was becoming increasingly important.
As AI-generated information became more common online, generative AI systems risked being trained on content created by other AI models. This could lead to “model collapse”, where systems produce increasingly repetitive outputs.
Around four billion people were expected to vote in national elections during 2024.
Changes in government created the potential for shifts in foreign, trade and economic policy, increasing uncertainty for businesses and investors.
The Financial Stability Board estimated that almost half of global assets, worth approximately $239.3 trillion, were held within the shadow-banking system. This had increased from $60 trillion in 2010.
The connection between shadow banks and regulated financial institutions created a risk that disruption could spread between the two systems.
High interest rates, economic uncertainty and geopolitical risk continued to affect investment decisions.
Business leaders remained cautious about capital expenditure while awaiting greater clarity over:
Governments faced the challenge of raising sufficient tax revenue while maintaining a competitive environment for businesses and individuals.
Changes in tax policy were expected to remain an important factor during 2024.
Sustainability remained an important consideration for boards, investors and regulators.
Global renewable-energy investment reached $1.1 trillion during 2023, exceeding investment in carbon-based energy for the first time.
The EU Corporate Sustainability Reporting Directive came into effect during 2024 for qualifying large and listed companies operating in Europe.
The regulations increased the need for:
Transaction volumes across Polestar CF’s five core sectors declined by 14%, from 3,731 deals in 2022 to 3,207 in 2023.
Factors affecting dealmaking included:
KPMG recorded a 10% annual reduction in UK mid-market private equity-backed transactions.
Private equity firms held approximately $2.39 trillion of global dry powder in December 2023.
Many corporate buyers had also accumulated cash that needed to be invested or returned to shareholders.
None of Polestar CF’s 2023 transactions used debt to fund the purchase consideration. This was the first time that had occurred since the firm began trading in 2004.
Debt-backed management buyouts were beginning to return as borrowing costs became more predictable.
Corporate buyers continued to use M&A to add specialist capabilities and support growth.
Cash-rich trade acquirers were less dependent on low-cost debt than private equity investors, although the economic and political environment continued to influence their decisions.
North American buyers remained particularly active in acquiring UK businesses.
UK venture capital deal volumes declined by 26% between 2022 and 2023.
Early-stage activity fell from £8.6 billion across 3,482 transactions to £5.9 billion across 2,464 transactions.
Later-stage investment declined from £12.8 billion across 3,107 transactions to £9 billion across 1,658 transactions.
More stable interest rates and valuations were expected to improve exit conditions and support renewed venture capital activity during 2024.
Software, media and technology recorded:
The first quarter accounted for 45% of annual activity. Transaction volumes then declined consistently, resulting in a particularly quiet fourth quarter.
Data and analytics, and software, telecommunications and services, were the most active subsectors.
Both also recorded significantly lower transaction volumes during Q4.
Listed technology valuations declined as investors shifted their focus from scale towards profitability.
Lower public-market multiples and high interest rates caused some shareholders to delay bringing their businesses to market.
Approximately £50 billion of UK private equity dry powder remained available for technology acquisitions.
The UK media sector ranked first in Europe, but companies found it difficult to obtain growth capital.
Only 33% of respondents to an RSM survey accessed the funding they required during the preceding six months. More than half held more debt than six months earlier.
ToolsGroup, backed by Accel-KKR, acquired AI and machine-learning company Evo for £12.37 million in September 2023.
The transaction represented reported multiples of 8.75x revenue and 23.04x EBITDA.
AI and machine learning, and data and analytics, recorded the highest average public-company multiples among the technology subsectors reviewed.
Growth was supported by the adoption of AI and data-led tools across the economy.
However, identifying which businesses would become long-term market leaders remained difficult.
Software, telecommunications and e-commerce were expected to experience slower organic growth than emerging technology markets.
This encouraged larger businesses to pursue acquisitions as an alternative way to add technology, customers and capabilities.
Production began to recover following the end of the US writers’ and actors’ strikes, but potential industry consolidation continued to restrict production budgets.
Platforms including Roblox, TikTok, Instagram and YouTube enabled creators to develop intellectual property at relatively low cost.
Successful properties could subsequently expand into television, film and gaming.
Business services recorded:
The sector maintained comparatively stable valuation multiples and continued to attract investment.
Consulting remained an important driver of M&A, including investment from international buyers.
Traditional consulting businesses generally attracted EBITDA multiples between 6x and 9x. Businesses with attractive specialisms or technology-enabled delivery models could achieve multiples in the low teens or higher.
Marketing and communications businesses faced pressure to become integrated service providers combining:
Businesses with strong niche capabilities remained attractive to consolidators.
HR automation supported operational efficiency and employee engagement.
Private equity firms continued to invest in HR platforms and consolidators.
Up to 85% of financial-services organisations had adopted AI, while 77% expected it to become essential within two years.
Technology introduced only a few years earlier was already requiring replacement or replatforming. This technical debt created further M&A opportunities.
Veritas Capital acquired Wood Mackenzie in a £2.8 billion leveraged buyout in February 2023.
Wood Mackenzie provided energy, sustainability and net-zero data, insight and consulting services.
Facilities management businesses were expected to experience strong growth.
Demand was supported by healthcare, education and office facilities, with sustainability and maintenance management among the most sought-after services.
Food-service growth was expected to slow as businesses faced:
Logistics and imports were expected to move back from the unusually high profits experienced after the pandemic.
Previous earnings had benefited from elevated freight rates and disruption-related demand.
Sustainability transaction activity declined during 2023 despite continued investor interest.
Venture capital accounted for approximately 70% of transactions and provided £2.2 billion of capital.
The remaining activity was divided relatively evenly between private equity and trade buyers.
Climate Tech and Clean Tech experienced the largest reductions in transaction volumes.
Both were heavily dependent on venture capital and were particularly affected by weaker market conditions.
Green Energy and Human Capital Management received proportionally less venture capital.
Climate Tech attracted a comparatively high average amount of funding per transaction despite completing fewer deals.
Private equity investors generally believed that strong sustainability credentials increased company value.
However, many owners remained uncertain about how to begin or develop their sustainability strategies.
Businesses were more likely to adopt measures offering clear and immediate benefits, including:
More disruptive measures, including carbon reduction, were less likely to be introduced where the short-term commercial benefits were unclear.
3i Infrastructure invested £28 million in Future Biogas in February 2023.
The transaction represented reported multiples of 1.47x revenue and 56.3x EBITDA.
Clean Infrastructure businesses were expected to experience rapid growth.
As these companies matured, their valuation multiples were expected to move closer to those seen across software and technology.
Green Energy and AgTech were expected to experience slower growth while companies established their positions in developing markets.
Many listed Green Energy and Climate Tech businesses remained at an early stage.
Their undeveloped markets and potential for future profit supported high valuation multiples.
Manufacturing and distribution recorded:
The sector was forecast to grow at a compound annual growth rate of 3.6% to 2028.
Manufacturers were increasingly investing in:
These technologies could improve production, inventory management and supply-chain efficiency.
The UK faced a shortage of approximately 74,000 factory workers, costing the economy around £6.5 billion.
Automation could enable employees to move from labour-intensive processes into more skilled roles.
The Government pledged £4.5 billion through its Advanced Manufacturing Plan to support the sector and help businesses introduce sustainability measures.
Headlam acquired Birch Close Trading for £4.1 million in January 2023.
The transaction represented reported multiples of 0.5x revenue and 29.5x EBITDA.
Trade acquisitions dominated the wider manufacturing sector.
Specialist manufacturing was an exception: venture capital was involved in 32 of the 34 transactions recorded during 2023.
Manufacturers continued to respond to disruption caused by:
These pressures increased the focus on onshoring and automation.
Regulation, reporting and consumer expectations required manufacturers to adopt more sustainable practices.
Waste reduction could support environmental objectives while also lowering costs.
Listed manufacturing EBITDA multiples remained relatively stable despite supply-chain pressures.
European cumulative defence spending was expected to increase from €700 billion to €800 billion by 2028.
This supported growth expectations across aerospace and defence.
Health and education recorded:
With the exception of managed care, activity declined compared with the elevated levels experienced during and after the pandemic.
Global Healthtech transaction volumes almost halved between 2022 and 2023.
Investors were assessing which businesses would emerge from the earlier period of rapid investment.
Differences between buyer and seller valuation expectations also affected transaction activity.
Consumer demand continued to support:
Edtech businesses continued to integrate digital tools into mainstream education.
Some 53% of undergraduate students were using adaptive education technology by January 2024.
Techstars invested £1.2 million in HandI Health in March 2023.
The transaction represented reported multiples of 1.91x revenue and 42.9x EBITDA.
Growth across healthcare and managed care slowed as demand for pandemic-related services declined.
Edtech had attracted strong multiples during the preceding years.
These were expected to settle as education providers assessed and fully integrated the technologies adopted during and after the pandemic.
Healthtech maintained strong growth expectations because the subsector included younger, high-growth businesses.
Growth was expected to continue as successful business models scaled and technology adoption increased.
AI and machine learning, and data and analytics, attracted high public-company multiples because of their growth expectations.
Business services multiples were comparatively stable, with premiums available for specialist and technology-enabled companies.
Early-stage sustainability businesses attracted high multiples based on projected growth and the undeveloped opportunities within their markets.
Manufacturing multiples were comparatively stable. Aerospace and defence benefited from increased spending and projected growth.
Healthtech multiples reflected the growth expectations attached to younger healthcare businesses.
The comparison used listed-company information, including businesses with market capitalisations below $1 billion where specified. Public-market multiples provide valuation context but do not represent a direct valuation for every private company.
Deal volumes across Polestar CF’s five core sectors declined by 14%, from 3,731 transactions in 2022 to 3,207 in 2023.
Higher borrowing costs, increased corporation tax, geopolitical instability, restricted access to debt and differences between buyer and seller valuations affected transaction activity.
UK venture capital transaction volumes declined by 26%. Capital investment and transaction volumes fell across both early-stage and later-stage funding.
Yes. Private equity firms held approximately $2.39 trillion of global dry powder in December 2023.
Business services recorded the highest combined number of private equity, M&A and venture capital transactions among the five sectors reviewed.
AI and machine learning, data and analytics, early-stage sustainability companies and selected Healthtech businesses attracted comparatively high public-market multiples.
Yes. Cash-rich corporate buyers continued to use acquisitions to add specialist capabilities and support growth. North American buyers were particularly active in the UK market.
More stable interest rates and valuations were expected to improve confidence. Available private equity capital, corporate cash reserves and pent-up demand for high-quality businesses supported the potential for increased activity.
