UK mid-market private equity review – H1 & Q3 2024

The UK mid-market private equity (PE) landscape saw an 11% decline in investment activity in the first half of 2024, with the overall PE market down by 20% compared to H1 2023. However, despite this decline, the UK continued to be an attractive destination for cross-border transactions, particularly those involving US companies or US PE-backed firms. The UK remains a key target for international investors seeking opportunities, as it still supports innovative growth companies and is a hub for tech and AI.

For smaller transactions (those valued under $250 million), there was sustained activity (in particular, because of a lack of financing for highly leveraged large M&A acquisitions), and a strong deal pipeline suggests that H2 2024 will see a pick-up in investment. The trend toward cross-border deals, especially in sectors like tech, healthcare (particularly femtech), and renewable energy, remained strong, with US investors continuing to lead the charge.

Q1 2024 highlights

The first quarter of 2024 saw a rebound in M&A activity from the lows of the previous 2 years, particularly driven by US investors looking to expand their portfolios in the UK. Key deals included:

• Tech: US cybersecurity company Rapid7 acquired UK-based NetFort, reinforcing its commitment to cybersecurity amidst rising global threats.
• Healthcare: LLR Partners, a US PE-backed firm, purchased UK pharmaceutical company Shield Therapeutics, taking advantage of the UK’s advanced R&D capabilities.
• Renewable Energy: Pattern Energy, a US corporate, acquired a stake in UK-based Good Energy, boosting its renewable energy assets in line with global sustainability goals.

Q2 2024 highlights

The momentum continued into Q2 2024 with several high-profile deals:

• Logistics: Blackstone, a US PE firm, acquired Clipper Logistics, driven by the need for efficient supply chain solutions post-Brexit.
• Tech: Square acquired Monzo, expanding its fintech capabilities in the UK market.
• Consumer Goods: TPG Capital acquired Mindful Chef, a health-focused UK food brand, reflecting the growing interest in premium, health-conscious consumer products.

Digital transformation was a key theme in Q2, with Splunk acquiring Rainbird, a UK AI and machine learning company, to enhance its capabilities and expand its European footprint.

Q3 2024 update

As we moved into Q3 2024, the UK market showed signs of renewed optimism, with several significant deals closing in the latter part of the quarter:

• AI & Technology: The AI sector continued to thrive, with Microsoft acquiring DeepMind’s latest AI subsidiary, based in the UK. The deal aims to strengthen Microsoft’s AI and machine learning capabilities, positioning the company to better compete in the global AI race.
• Renewable Energy: NextEra Energy, a US-based renewable energy giant, completed the acquisition of Octopus Energy, a major player in the UK’s green energy sector. The deal underscores the growing appetite for investments in sustainability and renewable energy assets.
• Consumer & Retail: In another significant deal, CVC Capital Partners, a global private equity firm, acquired BrewDog, the UK-based craft beer company. This reflects the continued growth in the UK’s consumer goods and lifestyle sectors, with investors keen to tap into evolving consumer trends.

Impact of the UK Autumn Statement 2024

The proposals set out by the Chancellor in the UK Autumn Statement should not have an impact on the willingness of US corporates and their backers to do business in the UK. The Chancellor did not change the current attractive R&D tax credit regime (though maybe this was a missed opportunity to make the UK even more competitive in this regard). However, the budget did arguably increase the cost of operating a business in the UK (by increasing the taxes paid by employers and the national minimum wage), and this may impact on valuations in a number of ways.

As expected, capital gains tax for sellers of UK businesses has gone up as a result of the budget (but perhaps not as much as we thought it might), but again, this has been largely expected and it remains to be seen if it impacts deal flow given the other favourable market conditions such as lowering of interest rates, increased economic certainty and the elections in both the UK and the US being in the rear-view mirror.

Outlook for H2 2024

As we look toward the second half of 2024, the outlook for US-UK mid-market M&A is optimistic. The tech and healthcare sectors are poised to continue drawing significant interest from US investors. The UK’s AI sector, in particular, is expected to be a major focus, with ongoing investment in data infrastructure, including new data centers to support AI growth. Investors will want to keep an eye on the UK regulatory framework in relation to AI.

The UK’s resilient economy and global competitiveness will remain attractive to international investors and the increased certainty following the Autumn Statement will offer a better environment for investment. With interest rates expected to remain low and a stable economic environment post-election, the UK is likely to remain a key market for US private equity firms seeking cross-border deals.

How we can help

At Cripps, we are here to help US corporates and US private equity firms navigate the UK market and seize opportunities in this dynamic landscape. Whether you’re looking to make your first move in the UK or expand your portfolio, our expert team can help you navigate the complexities of UK law, regulations and market practice.

With a partner-led approach and dedicated support, we will ensure that your cross-border transactions are seamless and successful. Get in touch.