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UK lower mid-market yet to feel Brexit heat

H1 deal volumes are on a par with 2015 despite uncertainty caused by the EU referendum, but in H2 the number of deals are ‘likely to be lower’.

Deal activity in the UK lower mid-market has held steady in the first half of 2016 despite uncertainty caused by the referendum on EU membership, a report has found.

According to the UK Growth Buyout Dashboard, produced by Lyceum Capital and Cass Business School, 40 transactions completed in H1 2016 worth an aggregate enterprise value of £1.63 billion. In the same period last year 39 deals completed.

Following the slowest first quarter since 2013 – with 17 transactions completing – activity picked up in the second quarter, with 23 deals closing. However, this momentum may not carry into the second half of the year.

“Volumes in H2 are likely to be lower than initially expected as investors assess targets’ prospects in this ‘New Normal,’” Lyceum partner Andrew Aylwin said in a statement.

Lyceum and Cass said that record levels of dry powder have kept competition tough, and this is likely to be compounded by an increase in international investors, who accounted for more than a fifth of deals in the first half of the year.

“While it is still too early to predict the extent to which Brexit will affect the lower-mid market in the UK, we believe this portion of the industry is well placed to benefit from the new environment,” Scott Moeller, director of the M&A research centre at Cass, said in a statement.

“Given the asset class’s strong performance and track record throughout the years, we believe that lower deal prices could also signal an increase in foreign investment, giving the industry even more scope and capability.”

Three quarters of the deals completed in H1 were management buyouts, and 10 were secondary buyouts. Fifteen of the deals had enterprise values of £10-25 million, 11 were in the £26-50 million range, and 14 were between £51 million and £100 million.

Business support services was the most popular sector, attracting 10 transactions, while eight deals were in the industrials sector; retail and leisure and TMT attracted seven deals each, and healthcare saw four transactions.

No lower mid-market transactions have been listed in the last year. The majority of the 18 exits in the first half of 2016 were to secondary buyers, followed by trade buyers.