UK capital markets have taken a significant hit in the first half of 2022 when compared to the same period last year with a combination of the conflict in Ukraine, the recent announcement of inflation hitting 10.1% and investors generally becoming reticent. As a result, the London Stock Exchange has seen a drop in listings of 45% in H1 of 2022 compared to last year. Poor reactions for high-profile companies such as Deliveroo, which was referred to as “London’s worst IPO in history” last year, have caused listings on the London Stock Exchange to dramatically decrease as the stock dropped over 40% after a month of being listed. This, alongside the average stock in Nasdaq trading 40% below its 2021 levels back in March of 2022, has made it less justifiable for companies to list during a time of record low valuations.

However, as UK companies steer away from public markets, private equity firms have turned their gaze towards the UK as low valuations allow them to acquire companies at a “discounted” price. American investors are looking to capitalise on the weaker sterling, making companies now nearly 20% cheaper to buy in the UK. Chris Biggs, CEO of accounting and consultancy firm, Theta Global Advisors, comments on the prevalence of private equity vehicles: “We are quickly moving into an environment where funding from private equity vehicles is going to become more common than funding through classic banks. Simply because these private equity houses are sitting on a pile of dry powder and need to get the cash out.”

One of the main factors that’s harming valuations is higher interest rates. To combat inflation, the Bank of England recently announced an interest rate increase to 1.75%, with markets now pricing in multiple rate hikes across the globe in 2022, valuations decrease as higher rates harm firms’ potential future earnings.

Misfortune in the IPO market has created an increasingly attractive proposition for companies to conduct M&As as a means for growth and financing. The question has arisen whether M&A activity will now accelerate, with buyers seeking to benefit from lower valuations – particularly in tech. CEO of leading business advisory, Trachet, Claire Trachet, indicates that: “As a general rule, higher interest rates should decrease M&A volumes because the debt which firms must take up to finance transactions becomes more costly, making it harder to successfully complete a transaction. However, as a result of a flailing IPO market and plummeting valuations, we could actually see an increase in M&A activity as buyers look to capitalise on firms being available at what is essentially a discounted rate.”

Trachet also highlights how crucial it is for businesses to be deal ready amidst the current uncertain market conditions: “I always stress to my clients the importance of being deal ready before heading into any potential transaction. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly.

“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”