It’s a truth universally acknowledged that political uncertainty can have a chilling effect on M&A activity with business owners tending to shelve any plans they may have until the outlook is clearer. However, new figures show that UK management buy-out (MBO) activity jumped sharply last year, as Brexit negotiations came under the spotlight, and the government lost its parliamentary majority. Although it seems that many business owners are deciding that it is the time to crystallise the value they have accumulated on their companies via an exit, the question remains why.
First, let’s take a look at the numbers. The number of MBOs rose by 20% last year, with 91 deals completed in 2017 compared to 76 the previous year. These covered a wide range of sectors, from well-known clothing retailers to specialist telecoms systems engineers. The highest proportion were technology companies, which made up a fifth of the total, while industrial and manufacturing companies also featured highly in deal-making volumes – accounting for 11% and 9% respectively. Overall, total deal value hit £2.7 billion last year, up from £2.6 billion the year before.
Ironically, our view is that political uncertainty is actually contributing to this rise. The closer than expected general election in 2017 has made the prospect of a change of government a distinct possibility. This is likely to have triggered MBO activity, as owners look to de-risk in case a future change in government results in the loss of favourable tax incentives such as ‘Entrepreneurs’ Relief’.
Entrepreneurs may be taking pre-emptive action as Labour has previously signalled it is likely to raise capital gains tax (CGT) should it enter government. They may also fear that although the current government has not signalled such a rise, issues such as the NHS funding crisis or higher than expected Brexit bills could make CGT a likely target for future tax rises.
For owners who have spent 20 or 30 years building their businesses, it is understandable that they will want to extract profits, rather than run the risk of seeing the tax environment worsen for entrepreneurs. Some of them may have spent a decade waiting for the right moment to exit – especially as the MBO market struggled through the credit crunch and recession. They will be keenly aware that optimal market conditions can be fleeting.
At the same time, businesses are also finding that MBOs are increasingly easy to fund, through both debt and equity finance. Private equity firms globally are sitting on record high amounts of ‘dry powder’ – some $1.7 trillion of uninvested capital in December 2017, according to consulting firm Bain & Co. They are therefore under pressure to put this excess capital to work.
This uptick in MBO activity is not just a boon for business owners and private equity investors, it matters to the businesses themselves and more widely to the UK economy as a whole. MBOs can re-invigorate businesses by incentivising new management teams, bringing in fresh ideas and impetus and injecting more capital; and in the process creating new ambition. That can encourage them to invest in innovation or expand their reach, and generally boost their market competitiveness.
The prospect of tax rises may be the catalyst for MBOs in many cases, but it seems that the timing is right for a number of other positive reasons too, as funding opportunities and attractive valuations combine to create the kind of advantageous environment that many business owners are keen to capitalise on. Management teams are seizing the chance to take their businesses forward onto the next stage in their evolution in today’s relatively benign economic conditions. All in all, the conditions are ripe for deal-making.