Michael Pay: Pressure to invest will turn on deal flow taps

Mergers and acquisitions in the UK appears poised for opportunities.
The reversal of 2023's inflationary pressures, rising interest rates and falling consumer confidence, being replaced in 2024 by wage growth catching up with price increases, lowering of interest rates and increasing business, if not consumer, confidence, is expected to bring about a resurgence of deal making activity in 2024.
To understand this resurgence, particularly from a sellers’ perspective, consider the impact that the macro-economic impacts had on deal activity during 2023.
Deals were down by more than 30 per cent from 2022's high of almost 8,000 for UK targets being acquired.
According to Experian's Market IQ, 2023 saw just over 5,500 deals completed in 2023. Comparing this to 2022 and the 10-year average of 7,500 deals being completed, it is clear that 2023's slowdown will have built a backlog of sellers wanting to exit.
Equally buyers, particularly Private Equity, need to deploy capital.
For Private Equity, even though 2023 was shaping up to be a lower call on funds than in 2023, they still spent less than they have.
PE funds are rewarded on investing and penalised for not doing so.
So 2024 will mean there is additional pressure to invest - and they have a lot of money to do that.
The last estimate of undeployed Private Equity firepower was more than $2trillion, according to the consultancy Baird.
Similarly, for corporates who have built up cash reserves, the need to grow in low growth economies will create a resurgence of activity, along with confidence that consumer confidence should improve.
As the cost of capital falls with falling interest rates easing financial burdens on acquiring entities. This will catalyse an upswing in deal activity as companies find it more appealing to engage in strategic acquisitions.
But challenges emerge. Geopolitical uncertainties, with not one but four elections in the G20 nations predicted to happen this year, including the UK and US, regulatory changes, and global economic fluctuations continue to cast shadows over M&A.
Those contemplating deals must carefully navigate this intricate landscape, conducting thorough due diligence to mitigate potential risks.

Michael Pay is a Director at EMC Corporate Finance