Dealmaking landscape is a cause for cautious optimism - David Davidson

The last 12 to 18 months have been a challenging time for the UK Mergers & Acquisitions and private equity dealmaking. While the Burness Paull team has continued to be involved in a considerable number of corporate transactions¸ there have been wider challenges that impacted deal activity and levels of business investment in late 2022 and 2023.

The continuing conflict in Ukraine, the fall-out from the September 2022 UK government mini-budget, high inflation, and rising interest rates all contributed to a significant slowdown in UK transactional activity.

There is, however, some evidence that, within the UK at least, confidence in initiating and funding corporate transactions is improving. Inflation is falling, interest rates appear to have peaked, and our sense, not least from speaking to our clients and the intermediaries and advisers with whom we interact, is that confidence in the UK (and Scotland in particular) as a place to invest seems to be increasing. Greater stability and predictability in the economy will hopefully encourage business owners to consider or revisit plans to secure investment for growth or to sell, which in turn will encourage potential investors and buyers to engage with more confidence.

Private equity funds, other institutional investors and certain acquisitive corporates have significant unutilised capital to commit to investments and acquisitions, and we would expect a number of these investors to take advantage of the improving transactional environment and deploy some of that capital during 2024.

David Davidson is a partner in the corporate finance team, Burness Paull

We are currently seeing some interesting trends in the M&A and private equity transactions we are advising on. Higher borrowing costs have impacted on the availability of debt to leverage the overall funding of deals, which has in some cases led to buyers utilising more of their own capital to fund transactions. We have also seen transaction timetables being extended to allow buyers to undertake more extensive due diligence, an element of deferred consideration being introduced to provide additional security for buyers, and the increased use of profit or turnover-based earn outs as a means of bridging gaps between the prices that certain buyers feel able to pay (or secure funding for) and the valuations that certain sellers are placing on their businesses.

Certain sectors are of particular interest to investors. Levels of investment into the energy sector have remained buoyant and this will continue to be the case as funding is directed towards the projects and infrastructure required to achieve net zero targets, particularly as the urgency attached to meeting these targets inevitably increases. M&A investment in UK renewables projects has also benefitted from the fact that deals in this industry are not typically debt funded and have therefore been largely unaffected by the recent tightening in debt lending experienced in other sectors.

We have also seen increased deal activity in other areas where Scotland is already strong or has considerable potential, such as technology, life sciences and financial services. Regardless of sector, however, there will continue to be interest from investors in businesses that generate consistent positive cash flow or have strong potential for growth.

Challenges undoubtedly remain. However, available capital, the continuing appeal of growth sectors, and an improving macroeconomic outlook for dealmaking all contribute to a feeling of cautious optimism for corporate transactional activity in 2024.

David Davidson is a partner in the corporate finance team, Burness Paull