Spotlight on: UK & Ireland
The UK & Ireland stood out in 2021 among European markets for their consistently strong buyout markets. What underpinned this performance, and what trends could define the near-term outlook for the region? Clearwater partners Sarah Taylor in the UK and John Curtin in Ireland share their insights.
The UK & Ireland buyout markets saw their combined annual deal total surge to €68.5bn in 2021
PE buyouts in the UK & Ireland scaled new heights in 2021. Dealmakers participated in a total of 279 transactions – far ahead of the previous annual record for the region of 239 deals set in 2018, and a remarkable increase of 49.2% on the 187 deals struck in 2020.
As with volume, so with value. The UK & Ireland buyout markets saw their combined annual deal total surge to €68.5bn in 2021 – an increase of 58% from the year before and a new all-time high for PE dealmaking involving UK and Irish targets, exceeding the €54.6bn worth of buyouts logged in 2019.
While dealmaking reached record levels in 2021 overall, the final quarter of the year was slightly subdued compared to the preceding frantic nine months. The deal tally in the UK & Ireland fell in Q4 with 42 transactions recorded, down 40% from the 70 logged in the previous quarter.
Aggregate deal value, however, did climb quarter-on-quarter, rising 50% to €19.8bn in Q4 from €13.2bn in Q3, denoting the announcement of a handful of very large transactions. This strong performance in value terms contributed to the higher multiples seen in the UK & Ireland, with the quarterly deal multiple climbing to 16.4x, bested in Q4 only by France’s 17.9x.
the average LTM multiple also rose, up 0.8 turns of EBITDA from Q3
With the pandemic’s end in sight, dealmaking in the near term will be propelled by the PE’s piles of dry powder and corporates’ strong balance sheets, says UK-based Clearwater International partner Sarah Taylor: “There is a wall of money for PE and trade. Debt is cheap, and a lot of people have cleaned up their balance sheets over the last two to three years, and they are now very focused on bringing in the right strategic assets.”
Against this strong background, the average LTM multiple also rose, up 0.8 turns of EBITDA from Q3 (and up 2.7 turns year on year) to give a multiple of 14.3x, versus a long-term multiple of 12.8x for Europe as a whole. The UK & Ireland have enjoyed six consecutive quarters of rising LTM multiples.
Focusing on sectors, business services was the busiest in terms of volume, with 11 deals in Q4, though these were worth just €1.3bn, the second lowest total among all sectors (only exceeding the €175m accrued from real estate’s lone transaction in the quarter).
People and businesses are adapting to new ways of working, so related assets are becoming far more attractive
The runaway leader in value terms was TMT, which logged the second most deals with nine. Those were worth just under €6.6bn in aggregate, more than doubling the roughly €3bn posted by second-place financial services. TMT has long been a favourite among PE players and a reliable generator of deal flow, but the total of 82 buyouts in the sector in the UK & Irish markets across 2021 was especially prominent, representing an increase of around 55% year on year. The annual increase in value terms was even more pronounced, up by more than 90% to €15.4bn from 2020’s €8.1bn.
Competitive bidding and the ‘flight to quality’ for high-quality TMT targets helped to drive up enterprise multiples. “People and businesses are adapting to new ways of working, so related assets are becoming far more attractive. In a high percentage of transactions across all sectors, technology is a big factor in the attractiveness of the target,” says Taylor.
One such deal was the take-private of Mimecast, which provides secure email services for enterprises, by Permira Advisers, with a multiple of 45.6x EBITDA. Transactions like this made Q4 a milestone for the sector’s LTM EV/EBITDA multiple, reaching 15.7x, a quarterly increase of 1.5 turns of EBITDA and a year-on-year jump of 2.2 turns.
businesses that are tech-enabled are attracting strong interest from PE
One can quite safely pencil in even more activity in the all-pervading TMT space. As Ireland-based Clearwater International partner John Curtin explains, “If we look at our pipeline, over 50% of our deals relate to technology, from software and IT services to fintech and artificial intelligence. We view technology as the overarching sector, with digital transformation being a key M&A theme in 2021 – businesses that are tech-enabled are attracting strong interest from PE, which is driving valuations in the space.”
Among other industries, TMT’s high multiple is surpassed only by the 16x logged in financial services-related buyouts, up a noisy 5.2 turns of EBITDA from Q3. However, as alluded to previously, that industry was not nearly as sizeable or busy as TMT, logging just three deals worth under €3bn in total in Q4 and only 15 for the year as a whole. Its high Q4 multiple was down in great part to one transaction in particular, namely Vitruvian Partners’ investment in CFC, a London-based technology-driven insurance business, at 41.7x EBITDA.
We have a strong underlying open economy, along with an abundance of quality assets
Despite hotspots in the TMT and financial services sectors, competitive valuations can still be found, notably in the industrials space. Even financial services, which saw one jumbo deal skew its Q4 figures, as well as business services seem likely to offer appealing opportunities.
For Ireland’s part, the future looks rather rosy, buttressed by strong fundamentals and absent the degree of political tumult that the UK is going through. As Curtin puts it, “From an Irish perspective, 2021 was a record year, and the signs for 2022 are very encouraging. We have a strong underlying open economy, along with an abundance of quality assets and a weight of private capital looking for a home.”
In the UK, as far as the inflation and monetary policy outlook are concerned, the impact on dealmaking may not be as severe as some fear. As Taylor explains, “The pipeline is strong and pitch activity is continuing to grow apace. Anyone looking at multiples will have to examine the underlying business and will have to assess what that inflationary pressure may look like and whether that can be passed on, but the quality businesses will still be fought over.”