Just like the rest of the UK, M&A in Scotland has been subdued recently. But with interest rates tipped to fall and (perhaps) greater clarity on the political road ahead post-election, corporate financiers and investors are in optimistic mood. Andy Thomson reports.
Elections are not everyone’s cup of tea, with endless soundbites, staged photo opportunities and false promises. But corporate finance and investment professionals in Scotland are perhaps in a minority in being able to find something encouraging in them.
“I think we will see a big pick-up in activity after the UK general election and then the US presidential election,” says Jon Shelley, partner and head of deals, Scotland at PwC. “Elections are obvious catalysts for markets like ours to take a step forward given increased certainty of where we’re heading in terms of policymaking direction.”
If elections do indeed spur activity, it will be an outcome that not many were expecting this soon. “I’m not sure many people had early July [for the UK general election] in their sweepstakes,” says Lee Donaldson, a Glasgow-based investment director at LDC. “Over the course of the past three to 12 months, not many entrepreneurs and business owners have been talking about the election and it’s not been in their list of top concerns.”
Those canvassed by Corporate Financier identified a few implications of the surprise election. On the one hand, those already well advanced with sales processes might have rushed to avoid the possibility of ending up in a less favourable tax environment. Many referred to possible changes in capital gains tax in the event of a Labour government, even though (at time of publication) no such plans had been announced and a Budget is not likely to happen until October. On the other hand, because elections bring uncertainty, some buyers and sellers may have waited to see how things play out – especially where there are likely to be sector-specific policy consequences.
Before the election was called, there was confidence in Scotland that the deal market was poised for modest growth after a difficult period. According to PwC’s Global M&A Trends 2024 Outlook, there was a 17% drop in UK M&A deals in 2023 versus 2022 – and Rory McPherson, an M&A corporate finance partner at BDO UK, believes this decline across the UK was mirrored in Scotland. “We’ve been in a sustained period where the market’s been down,” he says. “Interest rates going up has impacted private equity in terms of debt raising, corporates on the acquisition trail also face a high cost of debt, and PE firms are offering lower multiples in many cases as a result. Some sellers are still stuck in a 2021 mindset in terms of how much their business is worth, and there is a slow realisation dawning that there needs to be a bit of a realignment.”
Steady flow
However, it’s far from doom and gloom. There is widespread acknowledgement that Scotland is a bit of a ‘steady Eddie’ market, not prone to dramatic ups and downs in activity and – while not necessarily setting the world on fire – tends to demonstrate resilience, with a steady flow of deals regardless of the macroeconomic backdrop.
This being the case, Glasgow-based Panoramic Growth Equity’s recent experience was somewhat surprising, says senior investment manager Jake Wilson. The firm, which closed a £100m fund in August last year, invests across the UK and – given strong competition in the Scottish growth capital market, where the likes of Maven Capital Partners and Foresight Group are also active – had an expectation that Scotland would not feature prominently in the initial deployment phase.
“The funding landscape in Scotland remains relatively strong, which is great if you are a management team looking to raise new investment, or owners looking to take some cash out and de-risk. We have seen more opportunities in the past 18 months than has historically been the case, which is a real positive,” says Wilson. As an example, the firm was an investor in the MBO of Glasgow-based logistics specialist Bullet Express in October 2023. “Historically, Scotland accounts for 10%-20% of the opportunities we look at each year, so it’s encouraging we are starting to see more opportunities closer to home,” adds Wilson, who says another Scottish deal is close to completion at the time of writing.
Optimism for the period ahead is largely driven by the prospect of declining inflation and interest rates, easing the pressure on balance sheets and lowering the cost of capital. With so much talk of a higher-for-longer rate environment, no one was brave enough to forecast a dramatic upswing – but there is a feeling that confidence will gradually seep back into the market.
Deal origination is helped by a deep bench of advisory firms. “Scotland is pretty well serviced now,” says Patrick Graham, head of Scotland and Northern Ireland at BGF. “You’ve got the Big Four and then a strong mid-tier, as well as boutique operators.” Beyond the Big Four are the likes of BDO, Grant Thornton, Mazars, HNH Group and Aequitas Corporate Finance.
Graham adds that, on the investment side, there is a view expressed by some that Scotland is under-served – not one he agrees with, he hastens to add. There’s little evidence of a lack of capital at the early-stage end of the market where the country’s highly regarded universities produce a stream of spin-outs for angel investors to back. Firms getting frequent mentions here include the likes of Techstart Ventures, Archangel Investors, Equity Gap and Par Equity. Move up the deal size spectrum into the growth capital space and you find the likes of BGF, Panoramic, Maven Capital Partners, Foresight Group and YFM Equity Partners.
Visiting friends
Moving beyond growth capital and into the mid-market management buyout space, the likes of LDC and Scottish Equity Partners are frequent deal-doers while, for the larger space, Scotland sees visits not just from numerous private equity houses based in England, but also from global names – EQT, Oaktree Capital and Apollo were mentioned as firms you might see scouring the patch for deals.
When it comes to sector focus, one theme that many in the market note is the emergence of energy transition specialists seeking deals – including the likes of London-based general partners Bluewater Private Equity and Buckthorn Partners and Norway’s EV Private Equity. Aside from the Central Belt – where Glasgow and Edinburgh account for perhaps around three-quarters of Scotland’s deal volume between them – Aberdeen has always been an investment magnet due to its huge importance in the oil and gas industry. But these days, wind turbines are becoming more emblematic than oil rigs as investors clamour for opportunities relating to sustainability.
IT services is also a theme, according to Craig Goold, M&A managing director at BDO UK: “I think IT services is an interesting sector in Scotland. There’s a lot of well-established IT services players and there’s access to really good quality skilled labour.” Other attractive sectors include gaming, digitalisation, healthcare and life sciences.
Heading into the second half of the year, the mood in Scotland is upbeat if not euphoric. Interest rates might finally move in the right direction and, with electoral shenanigans out of the way, those involved in the M&A market can go back to concentrating on deal origination and execution fundamentals.
