International reaction following the announcement of the mini-budget and the International Monetary Fund’s (IMF) warning – which urged the UK to re-evaluate their strategy – led to a steep drop in the pound sterling causing capital markets to spiral this week. Although the Bank of England’s intervention to avoid increasing Gilt yields – interest on government bonds – to affect UK pensions calmed markets at close, the pound continues to drop this morning as a reaction from the government is yet to be seen.

What will this mean for the UK deals market?

The tax cuts introduced by Liz Truss’ government last Friday have increased fears of higher inflation which will result in further interest rate increments from the Bank of England to help combat these. Claire Trachet, M&A expert and corporate advisor says that higher borrowing costs and uncertainty means deals will remain very low for the remainder of 2022, with the beginning of 2023 showing little promise. There has been just over £0.5 billion raised through IPO’s this year, according to KPMG, compared to a staggering £16 billion in 2021. However, de-equitisation – the substitution of debt for equity through share buy-backs or M&A – has reached £42 billion, according to Dealogic.

Favourable regulatory conditions, a weaker pound and low valuations means investors are eyeing the divergence between the real underlying value of companies listed in the UK and their share prices. Private equity (PE) firms have firmly turned their gaze this week towards the UK as low valuations have produced fertile ground for acquisitions at a “discounted” price. Business advisory, Trachet, says American investors are looking to capitalise on the weaker Sterling, making companies now nearly 20% cheaper to buy in the UK – with tech and telecoms likely to be targeted.

Serving as testament to this, one of the world’s largest PE firms, Thoma Bravo, has just announced it is opening offices in London as it sets its targets on takeovers in the UK and Europe with talks of a potential takeover of cyber-security giant – Darktrace. According to PitchBook, PE firms were sitting on $3.2 trillion of dry powder by Q2 of 2022, driving PE investors to target considerably large companies with an increase in take-privates of UK companies. The recent announcement of the Competition and Markets Authority (CMA) dropping their investigation of New York based PE firm, Clayton Dubilier and Rice, and their £7 billion acquisition of Morrison’s marks the largest PE backed de-equitisation in recent British history.

According to business advisory, Trachet, the IPO market is yet to show any signs of improving and companies still have growth commitments which must be fulfilled – marking a shift for companies which will seek funding from PE vehicles and strengthen their position through M&As for the foreseeable future.

Claire Trachet, CEO and founder of business advisory, Trachet, comments on the mini-budget announcement and its implications for M&A:

“The mini-budget announcement has generated mass concern from industry leaders and the investment sector following a downfall in the value of the pound sterling coupled with the recent surge in the country’s borrowing costs. This was exacerbated by the IMF’s reaction earlier in the week which caused markets to spiral. The risk associated with this type of fiscal policy at a time of high inflation and even higher borrowing costs has resulted in a loss of over $500 billion in combined value from UK stocks and bonds since September 5th.

“UK M&As will see a flurry of overseas buyers looking to capitalise on the weaker pound sterling as valuations continue to deteriorate. This has its positives and negatives, on one side it will attract a great deal of foreign investment to UK tech, alongside new tax incentives and favourable regulatory conditions. However, low valuations means UK companies entering potential M&As may get less than they bargain for, it is a critical moment for the sector to show resilience.”