Investors being choosy but deals market feels more positive
It was inevitable that the market highs of 2021 wouldn’t last forever. The outcome was reduced deal volumes of about 30 per cent year-on-year.
Pre-Christmas, against that data and the backdrop of persistently lower activity levels (both volume and value) seen since the heady deal making days of 2021, the pressing need for many companies to transform, combined with the significant amount of funds built up by private equity, sounded a cautious note of optimism for the market in 2024.
The new year therefore brought increased activity to the M & A community.
Interest rates have stabilised, inflation is falling and less volatile markets are making it easier for dealmakers to price deals and plan ahead.
Conversations are showing that vendors are more comfortable about selling, investors are more positive about investing and alignment on pricing is becoming increasingly more commonplace.
As activity continues to return, the deals market feels very different. Corporates are being careful, and choosy. The pace of change is not affecting all sectors equally, which means that the upturn in activity is being unevenly distributed – we are already seeing strong activity in some industries such as TMT and healthcare/life sciences, while others, including consumer markets remain quiet.
Private equity houses are keen to get back to business as usual and invest the funds that have built up in recent years. But, while they are much more confident about market conditions, they also are targeting their investment carefully, concentrating on the same core, robust and resilient industries, as the corporates above.
This of course is good news for the East of England where a plethora of high-quality businesses operating in those industries exist.
TMT
The tech sector continues to be a key driver of deal activity and accounted for about 20 per cent of all transactions completed in 2023 by RSM UK across Europe.
Whilst in 2024 we have already seen layoffs by some of the world’s tech giants including Google, Amazon and Paypal, there are reasons to be optimistic. A stabilisation in the economy, interest rates and inflation has positively impacted the global software public markets.
Fintech is likely to continue to generate the highest volume of transactions in 2024, but our conversations with acquirers are increasingly turning to mission critical software and those sub-sectors that drive profitability and efficiencies such as business process improvement, AI and data-analytics.
Competition remains strong for high quality, business critical assets and technology that drive profitability for their customers, including AI and data analytics.
We expect to see an uptick in value and volumes in the second half of the year as elevated listed market valuations filter down into the private sector. Whilst we don’t expect valuations to hit the frenzied ratios of 2021, quality software assets will be very much in demand from an ever-increasing pool of buyers.
Healthcare and life sciences
The healthcare and life sciences sector also continues to be a key driver of deal activity, accounting for over 10 per cent of deals completed by RSM UK across Europe in 2023.
Overall, the life sciences, healthcare and MedTech sectors have stood out as a beacon of light in an otherwise sluggish post-COVID economy, and we have seen significant growth and innovation across all three areas.
Life sciences and Medtech: Large-cap pharma companies are expected to continue pursuing midsize biotech companies to fill pipeline gaps in the face of impending patent cliffs.
Investor interest in glucagon-like peptide drugs, used to counter diabetes and enhance weight loss, and a continued focus on precision medicine are likely to fuel M & A activity in 2024.
Healthcare: Over the course of 2024, we expect to see an uptick in the volume and value of healthcare M & A deals. One interesting trend we are seeing is several leading VC-backed companies looking at M & A as a tool to bolt on sub-scale competitors, thus acquiring customers, geographical access and products or features in a capital-efficient manner.
As this trend gathers pace, it may help to drive a generational shift by moving the startup healthcare ecosystem from a series of fragmented, single-solution companies to a more mature, multi-product, enterprise-scale environment.
Despite some negatives, the overall outlook for the life sciences, healthcare and MedTech sectors in the UK is incredibly positive this year. The sector is expected to continue to grow, with significant innovation and investment across all three areas.
