1. Result of the General Election 2019, clarity on Brexit
Whilst all business owners will have registered the resounding Conservative victory in the election, we have already started seeing the evidence that business confidence has increased in the New Year and this has also had a knock-on effect on attitudes towards M&A.
2019 M&A activity was slightly subdued in the UK by comparison to 2018 and most commentators blamed this on a combination of 3 factors – global trade tensions, Brexit and the general election.
Whilst the first of these rumbles on, it is increasingly likely that a US/China trade deal will be achieved. In the UK the election result of a business friendly, low tax government means that 2020 will see an uptick in M&A volumes with both Trade and PE releasing unspent funds from last year to supplement slightly lack-lustre organic growth.
2. Entrepreneurs Relief
Prior to the election there was significant discussion about Entrepreneur’s Relief with both Conservative and Labour politicians suggesting it needed addressing. The Labour policy would have been to scrap the relief, the Conservatives suggested it needed “review and reform” having not fully delivered on its objectives.
In previous years Entrepreneur’s Relief has been extended in scope to include EMI scheme holders as well as increased in amount – now applying to up to £10m of gain. The government have expressed concern that the unexpectedly high cost of the relief has not delivered the desired outcome of increased levels of entrepreneurship. At the same time we can take comfort that the government will continue to do everything it can to maintain a business-friendly attitude.
Whilst the threat of removing the relief altogether may have been removed it would be worth business owners and investors who are counting on benefiting from Entrepreneur’s Relief to follow the March budget and check on any adjustments. With the Prime Minister’s recent comments (17 January 2020), there may well be changes planned. Please check in with Rockworth if that would be helpful as we will be keeping our ears to the ground on this topical issue.
3. Brexit planning
Whilst an increased level of clarity on Brexit is helpful and has allowed plans to be firmed up and activity to start, the likelihood of a clean break Brexit has increased.
This will drive M&A volumes, both positively and negatively, in different sectors. We are already seeing an increase in interest from overseas parties needing a footprint in the UK to continue their own trading on the one hand whilst those industries most affected by the changes will have their hands full and so we are finding that operational factors are taking precedent.
4. Key trading themes for 2020
Specific sectors will see certain factors continue to grow in importance and therefore be key drivers for M&A. Our predictions include:
Sustainability and environmental concerns
FMCG / fashion etc need to continue to address consumer concerns at pace. Automotive transition towards electric will continue to accelerate but also Hydrogen and alternative (synthetic) fuels will grow in importance. ESG concerns continue to become more important as well.
5G, connectivity continues apace with IoT finally moving into the mainstream
Retailers continue to diverge with large numbers of losers and smaller numbers of ‘super winners’
Stock market returns are predicted to remain subdued with balance sheets strong, this maintains a level of pressure on M&A to supplement growth
5. Private Equity Competition
The proliferation of Private Equity Funds continued during 2019, as well as new funds being raised by existing firms. There is now more Private Equity funding to be invested than ever before. The competition for deals has therefore increased which is encouraging for vendors of high quality businesses.
The only note of caution is that levels and complexity of Due Diligence has also increased meaning that preparation is critical for deals to succeed and vendors should be aware that it is now common-place to have not only financial and legal Due Diligence but also formal analysis (often led by external consultants) of real estate, insurance, commercial landscape, IT, HR, culture and other more niche areas.
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