Deal activity has rebounded strongly following the volatility of 2020. The ongoing COVID-19 vaccination rollout and gradual easing of lockdown measures have boosted economic growth and encouraged deal activity in the first half of 2021.

Data from Mark to Market shows that UK M&A deal volume started to recover in the second half of of last year and is now surging higher than deal volume pre-lockdown. As we look optimistically towards the rest of 2021, we reflect on recent trends observed in the UK M&A market.

Inbound Foreign Investment 

Inbound M&A investment from overseas has increased significantly during the first half of 2021 despite the initial ongoing lockdown measures and travel restrictions. In Q1 2021, inbound M&A was worth £58.7bn, over three times higher than Q1 2020, which saw £18.6bn of inbound M&A. With 196 deals, Q1 2021 also represented the largest quarterly inbound deal count since Q3 2017, where there were 200 deals. The largest portion of inbound M&A came from US investors, with a total deal value of £36bn. This trend ultimately highlights the UK’s continued position as an attractive market for international investment and cross-border transactions. 

Technology, ESG, and Consolidation         

With National Grid’s £14.2bn acquisition of Western Power Distribution being the largest EMEA transaction of 2021 so far, the energy, mining, and utilities sector has been the most active sector by value with £20.7bn across 28 deals. This reflects a trend of more deals being driven by the energy transition as the UK works towards achieving net-zero carbon emissions by 2050. Market analysis shows £40bn of investment in green infrastructure will be required annually to meet the 2050 target. Further to this, 42% of respondents in a recent survey of investors expected ESG to become an increasingly important consideration for M&A decision-making in 2021. We can consequently expect more deals driven by environmental goals and broader sustainability factors.

Technology continued to attract significant investment, with £20.4bn of transactions in Q1 2021, making up just over one-quarter of UK deal-making. In the five months to May 2021, the IT services subsector saw a notable increase in deal volume, primarily driven by private equity investments and bolt-on acquisitions for private equity portfolio companies executing buy and build strategies. With 103 completed transactions, IT services deal volume grew 75% on the same period from 2020. A key part of the sector’s appeal is its COVID-resilient nature, and we expect investors and buyers to continue taking particular interest in these types of business models.

Beyond the technology sector, businesses offering tech-enabled solutions are expected to attract the most investment, whether in consumer, energy, or any other sector. Of the UK’s 80 ‘unicorns’, many of these, including Gousto and Gymshark, are tech-enabled businesses disrupting their sectors. 

There remain many opportunities, with consolidation observed and expected in many sectors, including the consumer, financial services, and business services sectors. We have seen various high-profile deals illustrating this trend, most notably the acquisitions of UK sports nutrition bar brand Grenade by multinational confectionery firm Mondelez and ASOS’s acquisition of Arcadia Group brands such as Topshop, Topman, and Miss Selfridge.

Venture Capital Deal Activity

According to data from PitchBook, UK & Ireland (UK&I) total venture capital deal value is on track to beat the current annual record, while exit value has already surpassed the previous record. Q1 2021 saw £5.2bn invested across 503 venture deals. The UK remains the largest venture capital ecosystem in Europe in terms of overall deal value. Notably, three of the five largest unicorn rounds in Q1 2021 were from UK businesses.

With approximately £243bn of dry powder amongst private capital firms, there has been significant pent-up demand to deploy capital. Now with increasing opportunities to invest in 2021, venture capital firms have taken an active interest across a range of sectors, with IT, healthcare, and financial services in especially high demand. 

Looking Forward

The UK’s M&A outlook for the remaining six months of 2021 looks positive. Increased investment and consolidation are expected to follow the opening of the consumer and leisure sectors, both from a growth and distressed perspective. As government COVID support programmes gradually come to a close, it is expected that there will be more distressed and private equity investors looking to deploy their funds and capitalise on new market opportunities. With the abundance of activity ongoing within the M&A and venture capital markets, it is an opportune time for many businesses to consider whether they could benefit from inorganic growth or a capital raise.

Here at Gerald Edelman, our Deal Advisory team offer a full suite of M&A services for business owners and entrepreneurs at each stage of the business lifecycle. Collectively, with decades of experience managing corporate deals across a broad range of industries, we have built a substantial network of buyers and investors at both a local and international level. 

If you would like to discuss whether now is the right time to think about raising external investment, selling your business, or acquiring another business, please feel free to get in touch with Nick Wallis or our Deal Advisory team today.

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