Private Equity firms told to splash the cash

The decision from Private Equity houses as to whether to make investments will be 'key' to Yorkshire's economy in 2017, one of the region's top accountants has said.

KPMG’s head of corporate finance in the region, Christian Mayo, anticipates “a market largely driven by private equity’s raison d’être” as he looked ahead to what Yorkshire can expect to see in 2017 in terms of M&A activity.

He added that growing SMEs whose operations are largely insulated from any negative impacts of Brexit will be highly sought after as a result.

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In particular Mr Mayo said he anticipating sectors such as tech, financial services and infrastructure to prove attractive, with more customer-centric businesses exposed to an expected slowdown of consumer spending as higher inflation and depressed wages cool demand.

“The key to our regional market is the need for PE to spend its money,” he said.

“PE will surely keep calm and carry on dealmaking because it must invest.

“As a result good businesses, especially those insulated from the impact of Brexit and with growth potential, are highly sought after meaning prices remain high.

“The owners of private businesses with strong performance may therefore see the next 12 months as a potential window for exit.”

Mr Mayo said that Britian’s vote to leave the European Union would continue to influence the appetite for mergers and acquisitions throughout the year but that the resultant weak value of Sterling would see a medium term pick up in inbound investment.

“After the sharp intake of breath taken by those involved in transactions immediately following the 2016 referendum, appetite for quality acquisitions has maintained the pipeline for regional deal-doers.

“There’s no doubt that the shadow cast by Brexit will continue to impact M&A in 2017, with UK trade buyers in particular nervously assessing the risks of progressing domestic targets in some sectors, and as uncertainty prevails we may see a ripple effect across the market. But equally, a weaker pound has led to optimism in some quarters about the prospect of increasing inbound activity in the medium term, with overseas buyers exploiting their greater currency leverage.

“In addition, the debt market remains relatively buoyant, with high levels of liquidity through a variety of funding resources. There is a positive lending environment for SMEs to large corporates with interest rates at record lows, although the looming risk of inflation may force central banks to increase rates over the medium term.

“Many well capitalised businesses seeking growth in relatively benign conditions, will have acquisition on the corporate agenda as a means to drive shareholder returns.

“The risk and reward dynamics around deals will vary by sector but it has to be said, the overall tone is likely to be more cautious given economic uncertainty.

“There is a new norm for diligence, which is increasingly likely to include a degree of scrutiny over the potential longer term risks that the Brexit process and an independent UK might have on acquisition or investment targets.

“In particular, buyers will want to understand cross-border customer and supplier dynamics both in terms of foreign exchange flows and trade arrangements. In some cases there will be clear positives, such as with Sumo Digital, that we sold last year and which had global revenues in dollars.

“Given the pause last summer, delaying the start of some transaction planning from autumn to winter, I expect completions to feed through in quarter two and three rather than one.

“And, from a sector point of view, while the pipeline is varied.”