Interest rate hikes and unsettled markets rain on private equity’s dealmaking parade

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Something unusual is happening in the UK economy - unemployment and inflation are falling at the same time.

Private equity dealmaking has cooled in the first six months of the year as rapid interest rate hikes and unsettled markets rained on the parade of a predicted deal frenzy, new figures have revealed.

The number of private equity deals in the UK fell to 689 from 909 last year, with just 327 deals worth £32bn done in the smaller mid-market, where transactions were expected to recover more sharply,  according to the latest deal tracker from KPMG.

The figures show a slower than expected six months after a wave of deals had been predicted following a torrid 12 months last year.

Rising interest rates in the UK have ramped up the cost of debt and made big takeovers harder to finance, while volatile markets have posed pricing challenges to prospective suitors.

“While there were high hopes of a return to stability as we entered 2023, it soon became clear that rising inflation and interest rates, together with geopolitical uncertainty, continued to erode confidence and impact deal volumes,” said Alex Hartley, head of private equity within corporate finance at KPMG UK.

“These challenges also impacted the debt markets and we saw a significant increase in the price of debt, a much more cautious approach from credit committees to new deals and reduced leverage multiples.”

Listed firms in the UK had widely been predicted to be at risk of a flurry of takeover swoops as buyers took advantage of low prices in the UK. While dealmaking has slumped dramatically from a blockbuster year in 2021, Hartley added that the number of private equity deals was still on a par with pre-covid levels.

Business services and tech and media firms proved to be the juiciest appeal for buyers in the first six months, accounting for almost two thirds (63 per cent) of all mid-market private equity deals in the first half of the year, according to KPMG’s numbers. 

Business Services accounted for 46 per cent, up from 40 per cent in the same period last year, while TMT deals represented 17 per cent, down from an average of 21 per cent over the last five years.