Tech buyouts bolster UK mid-market activity in H1

The UK mid-market has been in fine form in the first half of 2018: Unquote recorded 42 buyouts valued in the £50-500m range, making H1 a tie for highest half-year dealflow since H2 2014. The mid-market buyouts completed between January and June this year totalled £6.02bn, a 41% uplift on the £4.27bn recorded in H2 2017.

"We are continuing to see high volumes of private equity activity, due both to GPs' appetite to invest in new platforms, and to add on to existing portfolio companies," says Marcus Archer, a partner and head of UK private equity at Clearwater International.

"Private equity interest in backing high-quality management teams in good businesses continues," says Archer. "And the need to deploy capital – either to start spending a new fund or investing the final cheque in an existing fund – combined with buoyant debt markets, is driving the continued high level of activity."

Clearwater recently released its Multiples Heatmap Q1 2018 Update, tracking entry multiples for private equity buyouts across Europe. The report found that UK buyouts across all value ranges averaged a 9.9x EBITDA multiple, slightly down from the 10.5x and 10.8x figures seen in Q2 2017 and Q3 2017 respectively, but remaining firmly in line with the European average. This is somewhat surprising given the persistent uncertainty surrounding the UK government's Brexit negotiations and the knock-on implications for businesses across the country.

TMT on a high
Of particular note are the high multiples in the technology, media and telecommunications (TMT) space, which averaged a 10.5x entry multiple in the UK across the most recent 18-month period, according to the Clearwater report. Unquote Data also shows a considerable spike in UK buyout activity in the space. In the £50-500m range, H1 2018 represented the second successive half-year of increased dealflow and aggregate value in the TMT space, reaching an all-time high of 12 mid-market buyouts and the second-highest aggregate value on record at £1.53bn.

The need to deploy capital, combined with buoyant debt markets, is driving the continued high level of activity" – Marcus Archer, Clearwater International

"Private equity firms have become increasingly comfortable with investing in technology companies," says Paul-Noël Guély, managing partner at TMT-focused M&A advisory firm Arma Partners. "In the UK, we are currently seeing a sustained volume of mid-market buyouts and consistently high valuations being ascribed to companies in the sector, despite the uncertainty associated with the Brexit process. This is testament to both the fundamental quality of the UK's ecosystem of technology companies – which ranks among the most mature and sophisticated in Europe – and GPs' understanding of these businesses' long-term growth potential. This helps mitigate short- and medium-term concern about geopolitical risk."

Brexit insulation
This view is supported by Carl Houghton, a partner and international head of TMT at Clearwater. "No sector is completely shielded from Brexit uncertainty," he says. "But within TMT, software in particular can cross borders more easily than most other sectors, which affords it some insulation. Tech businesses also often have the capacity to grow more quickly than assets in other sectors – this does not reduce Brexit risk but it certainly mitigates it.

"On top of this, we have the ever-increasing amount of dry powder that private equity has to invest, and while there are some signs this is peaking, at a macro level we still have too much money chasing too few quality deals."

The importance of the tech industry to a post-Brexit UK is reinforced by the very different mid-market picture that emerges when TMT deals are omitted from buyout figures. Excluding TMT, there were 30 buyouts valued at £50-500m in H1, according to Unquote Data, with a combined value of £4.49bn. While these figures represent a considerable uptick on the 25 deals worth a combined £2.88bn seen in H2 2017, they still represent just the sixth and seventh highest figures respectively across the past 10 half-year periods.

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