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Bumper 2016 for UK SMEs as investor demand beats Brexit odds

  • PE investment into UK based SMEs remained high in 2016, in spite of Brexit vote
  • 82 lower mid-market investments reported in 2016 with aggregate value of £3.33 billion
  • Foreign investment increases, but the majority of buy outs still backed by Sterling denominated funds managed by UK based investors.

 

Amidst a year underpinned by uncertainty, UK based small and medium sized businesses continued to attract high levels of private equity investment throughout 2016. In addition to the 42 buy out deals reported in the first half of the year, an additional 40 deals were completed in the remainder of the year, a large proportion of which (33%) occurred in July, soon after the referendum result.

The quarterly Lyceum Capital and Cass Business School UK Growth Buyout Dashboard analyses new investments in majority deals backed by private equity firms, with an enterprise value between £10m and £100m. The latest Dashboard shows that there were 82 lower mid-market investments in 2016 with a value of £3.33 billion. These figures are not far from the five year high seen in 2015 (87 deals with an aggregate value of £3.43 billion), illustrating the underlying confidence that investors have in British businesses throughout a year of political turbulence.

The findings show that midsized buyouts in the UK are in stark contrast to the global trend of a slowdown in activity in 2016.

The attractiveness of the UK lower mid-market to foreign investors established in early 2016, continued to be evident in the latter half of 2016, with 22% of deals completed by non-UK managers including some established US investors such as Carlyle and Arlington who have not been known to invest in this space. Foreign investors are increasingly recognising the growth opportunity offered by UK businesses. That said, the majority of investments (78%) continue to be made by Sterling denominated funds managed by investment teams based in the UK.

The TMT sector was the standout performer in 2016, with 20 investments made over the course of the year, an increase of 67% over the previous year and the highest level of investment in the sector seen since 2011. TMT investments accounted for 25% of deals in 2016, for an aggregate value of £790m.

Commenting on the findings, Andrew Aylwin, Partner at Lyceum Capital said:

“Few would have predicted such a buoyant environment for new private equity investments in the UK lower midmarket in 2016 given the uncertainty created by the referendum result. Despite a slowdown of buyout activity on a macro level, the UK mid-market has bucked the trend. The attractiveness and strength of this segment and the businesses in it can be seen in the significant amount of new capital invested, which supports continued and accelerated growth. While political and economic risk may result in increased volitility in the year to come, we can be confident in the UK’s ability to foster strong entrepreneurial and managerial talent and continue to be a growth driver of the economy, against the odds.

Professor Scott Moeller, director of the M&A Research Centre at Cass Business School, added:

“The UK lower mid-market has proven both its appeal and resilience this year despite the challenging political environment that we saw. Exposure to companies in this segment is clearly appealing to investors, both domestic and foreign, and the attractiveness that we saw building throughout the year has been maintained. This gives us confidence that we will continue to see strength in this segment going into the new year.”