Real Deals Magazine | Q&A Excerpt: Phillip McCreanor Shares UK M&A Outlook
Originally published by Real Deals on November 11, 2021.
What has been driving the unprecedented levels of M&A deal flow in the UK market this year?
Phillip: A number of things. At the start of the year, there was still an overhang of businesses from the pandemic era where processes were delayed. And so, as the market started to reopen, those delayed processes started to come back alongside those that just naturally were on a timeframe to kick off in 2021. People were also eager to get deals done prior to any changes in Capital Gains Tax. That was certainly a big factor in the US and has been a consideration in many of our deals in the UK. On top of that, there has been a very strong financing market, so for private equity firms, they’re looking for a home for their money. For public companies who are trading on very high multiples, in order to justify the implicit growth assumptions in their share prices, they need to get on and spend money and make acquisitions to show growth. With all of that going on, it has been a very strong market.
How has Lincoln International managed its record pipeline following the pandemic?
Phillip: It was all about protecting the team during 2020. We made sure to keep all of our sector teams and product teams together; we continued to actively invest in our people and made a number of strategic lateral hires. In keeping the teams together and keeping that focus on the marketplace, it has meant that we have been in a great position to help our clients to take opportunities without having the challenges of re-engaging with the market or staff. We’ve also focused on individual sub-sectors and trying to think about how they’re going to unfold over the coming period, thereby placing our bets early and ensuring that we’ve got the right resourcing to look at those genuine opportunities. By maintaining all those business disciplines, I think we’ve been able to come through the period very strongly.
What have been the key challenges in doing deals from a due diligence provider’s point of view?
Phillip: There has been a limited number of due diligence providers in the marketplace and I think some of the larger providers reached capacity early on due to resourcing issues following a surge in deal volume. Consequently, we’ve seen a number of those boutique houses starting to emerge and take even more market share. They’ve been able to attract staff because they have different remuneration structures. And so, whilst they’ve come under some pressure themselves, what we found is that they’ve been willing to support us and our clients. Another big area has been the W&I market. Most deals coming through the UK will be insured and the lack of bandwidth in that market has meant that deals have just naturally slowed down as you’ve headed towards the finish line.
How have UK valuations and multiples performed this year?
Phillip: Lincoln’s Valuations & Opinions Group has performed quarterly valuations on over 100 private UK companies in 2021 across over 70 sponsors, which represents over £70bn in Enterprise Value. What we can see is the LTM Ebitda multiples have gone up very slightly during the first half of the year, peaking at 13x as of our mid-year valuations, but those multiples have come back a bit to around 12.5x LTM Ebitda as of Q3. This makes sense, as depressed earnings from Covid during 2020 have broadly rebounded during 2021. In spite of rising EV multiples, we’ve seen the leverage underpinning those acquisition multiples remain flat at about 5.5x throughout the same period.
Given the strong competition for assets, how can firms stand out?
Phillip: We’ve been recommending clients to engage early. It’s a bit of a self-fulfilling prophecy, but what we’ve been very keen to do is to make sure that opportunities are on the right buyer’s radar screens and they’re getting a chance to speak to the company fairly early in order to build rapport and traction. This is a huge advantage in a crowded market. As a result, we’ve seen more examples of bilateral pre-emptive deals being done, or people running very hard in round one and being able to complete early in round two. That has become a bit of a feature. Those able to capitalise on the best opportunities in the market are those who position themselves early and are able to execute efficiently. The last 12 months have been marked by a very strong mix of domestic and cross border deals in the UK.
How attractive are UK companies to acquire?
Phillip: The UK has got a lot going for it. If you look at a lot of the acquisitions that have been made into the UK, they’ve been from the US and I think that the link between the UK and the US continues to grow stronger in many ways. It’s a natural stepping stone for Americans because it tends to be a similar entrepreneurial culture, similar rule of law and regulatory environment, which appeals to US buyers. Looking ahead, the UK Government’s recent Autumn Budget is only going to add more fuel to the fire. With inflation going up 4.5 percent, we’ll see strong growth numbers behind companies and they’ll continue to remain very attractive.
Phillip McCreanor, Head of Investment Banking, UK & Nordics at Lincoln International, discusses key trends driving UK M&A deal flow and opportunities for businesses in the year ahead.
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