Official figures from the Office for National Statistics (ONS) show the UK economy grew by 0.5% in May – much higher than the flat rate of growth many were expecting after shrinking numbers in April and March.
The Director of Economic Statistics at the ONS, Darren Morgan, has stated the UK economy has “rebounded” largely across sectors such as construction, services, and manufacturing. This could provide renewed optimism for dealmakers after the value of M&A in the UK dropped by 20% in the first quarter compared to the same time last year – though the actual number of deals has remained strong in 2022.
Chris Biggs, CEO of accounting and consultancy firm, Theta Global Advisors, thinks that the combination of a more positive outlook and company valuations that have plummeted, could provide a wealth of opportunities for deep-pocketed private investors.
“Though the British economy bounced back in May, continuous rising interest rates have caused a significant shift in the deals market,” Biggs said. “I think the private equity houses are looking for opportunities to invest in new companies, because it’s that first phase where you can start to invest and grow it – that’s where you can add the most value and see your overall investment grow. So, the problem is, if it’s a company they have already invested in for three, four or even five years they have already gone through that cycle. So, if they invest more in it, they are going to get smaller returns for what they invest in.”
Deals done during downturns provide better returns
An analysis from PwC has even highlighted that deals done during times of economic downturn often provide buyers with better returns, meaning that there could be a strong flurry of activity in the second half of the year, even if the growth in the economy progresses to a plateau or slight fall.
There has also been an increasing number of public-to-private transactions so far in 2022, further highlighting the opportunities that can be found in the current market. Ultimately, during times of high inflation, investors do not want to be sitting on their cash. This means that despite current market uncertainty, there will continue to be activity from VC houses and institutional investors – whether that is through acquisitions or funding.
However, there has been a notable shift in the market away from late-stage start ups with high cash burn, as a much greater emphasis is now being placed on sustainability. Therefore, it is the early-stage start ups with this ethos in mind that stand in better stead amidst this challenging environment.
Not everyone has been as bullish on the latest UK economic numbers: “While it’s positive to see a small nudge upwards in overall GDP, these figures are hardly shooting the lights out,” observed Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown. “It will take something strong to fully reverse fears the UK’s heading towards a recession in the coming year. Frankly, until there is a clear path out from political turmoil, the energy crisis, cost-of-living squeeze and the UK’s far-reaching productivity problems, it’s hard to see where the economy will find its take-off point.”
“The surprise increase after April’s disappointing 0.3% drop comes as welcome news, but the possibility of the UK entering a recession during the second half of 2022 and beyond still looms large,” said James Brown, Managing Partner at Simon Kucher & Partners. “The challenge is further compounded by the substantial margin erosion many UK businesses have been experiencing as a result of heightened inflation and a significant number have delayed raising prices for fear of high-volume losses and damaging their reputation.”
