Corporate finance professionals across the country say it’s currently a struggle to get deals over the finishing line. The prospect of a change of government might provide a helping hand, but elongated processes mean that advisers all over the UK are facing protracted processes.

“Busier than ever” is how Gary Partridge, founder and managing director of Cardiff-based Lexington Corporate Finance, describes his current workload. But while the old saying is that being busy is preferable to the alternative, there’s a frustrating aspect to it in the context of the Welsh corporate finance market. While the scoreboard was regularly ticking over as Wales inflicted a crushing defeat on the Aussies in the Rugby World Cup, the ‘deal-o-meter’ is not currently moving at quite the same rate. 

“The number of deals has been going down, but we’re all busy. I think there are two things going on,” says Partridge. “One is that deals we’re working on are definitely taking longer. The other – in terms of the pipeline – is that lots of business owners are asking us whether now is the right time [to go to market] and, with volatility in the UK economy, there’s just a bit more hesitancy.” 

Smaller but plentiful

Although figures for the second half of the year will not be in for a while, the first half was in fact something of a boom period – however brief – for the Welsh M&A market. According to the Experian M&A Review for H1 2023, Wales saw 144 deals – up 18% year on year – although deal value plummeted 78% over the same period as the focus was almost exclusively on the smaller end of the market.

But while the market appears since to have experienced something of a lull, there is some hope that a revival may happen soon – driven in part by the UK political scene and a possible key change of taxation policy in the event of a Labour victory. 

“One thing Wales-based business owners and investors have their eye on is the outlook for capital gains tax (CGT) in the event that we have a change of government in the next year or two,” says Jamie Roberts, a corporate finance director in Wales for Grant Thornton. “Historically, mooted changes to CGT acted as a stimulus for dealmaking and I would envisage seeing some kind of uptick associated with this again.” 

Adapt and survive

What could also help is the resilience of the local business community and a sense that the current environment, while challenging, is also a fact of life that people can accommodate. 

“Activity in the SME sector has been particularly resilient after the successive shocks of COVID-19, the Ukraine war and then rising interest rates,” says Katherine Broadhurst, a Cardiff-based corporate finance partner and regional lead for the Central and West at Azets. “Deals are happening because firms have decided this is the new normal and they just have to get on with it.” 

In which sectors are the deals happening? Beyond those in traditional manufacturing industries, which continue to play a significant role, Broadhurst points to the healthcare sector as probably the biggest driver of deal flow, while others mention business-to-business services, IT and energy security/energy transition – all staples of deal flow around the UK. But Partridge points to a possible outlier. 

“An interesting one that’s cropped up – and I think this might surprise people – is professional services, in particular the accountancy and legal services sectors,” he says. “There’s been a lot of activity there over the past 12 months and there’s probably more to come with the advent of artificial intelligence disrupting the old guard and the established ways of doing things. Quite a lot of private equity money has gone into that.”

Debt drought

As elsewhere in the UK, and indeed around the world, Welsh businesses are not finding it easy to secure debt finance. Part of the problem is that even debt from the high street banks is not cheap. 

“The high street banks aren’t reducing margins as they might have done when interest rates were previously high, so due to the impact of their different funding structures there’s not necessarily a significant difference in total interest rates between the high street and challenger banks at the moment,” says Broadhurst. “My feeling is that margins are remaining consistent because they’re expecting rates to come back down again in the short to medium term.” 

Among the active debt participants in the Welsh market, the likes of ABN AMRO Commercial Finance, Shawbrook Bank and private debt platform ThinCats all get frequent mentions, along with the Welsh government-owned Development Bank of Wales (see box, Through thick and thin). There is perceived to be a move to more innovative forms of financing, including invoice discounting, said by one market participant to be “more popular than it has been for a while”.

There is an acknowledgement that the corporate finance community is a relatively modest size. “It’s well populated, but a lot smaller than other regional conurbations,” says Geraint Rowe, a partner in the Cardiff office of Gambit Corporate Finance. “There’s a reasonable coverage of advisers for the fairly limited size of the market. For larger deals, you have London-based or international groups coming in and out.” 

Roberts agrees that, while being well served, the community is small. But he believes this is to its advantage: “While the network of financial intermediaries is vast and diverse, Wales can also feel very small in the sense that virtually everyone is connected to everyone else in one way or another,” he says. “I think this can provide the basis for new M&A ideas and initiatives, and results in us punching above our weight.” 

So a positive message from Roberts as the Welsh corporate finance community contemplates a still-volatile environment in the closing months of 2023. It’s also an environment in which a vibrant corporate scene seems certain to produce interesting opportunities.