Private Equity Investments in UK SMEs Hits Two Year High

Britain’s small and medium sized businesses have proven to be more resilient than global corporations so far this year. Despite continuing fears over a slowdown in China, and larger UK businesses being hit hard by the Greek debt crisis, things are looking up for Britain’s small businesses. 

Private equity investment into Britain’s small and medium sized businesses reached a two year high in the first half of 2015, according to statistics published by Cass Business School and private equity firm Lyceum Capital. Cass Business School analysed control investments with an enterprise value between £10 million and £100m, showing that the volume of transactions during the first half of 2015 was consistent with the previous six months.

Small deals, with a value lower than £50m, however, accounted for 80 per cent of activity and increased 16 per cent on the first half of the year. This means that small businesses are in rude health, attracting an increasing amount of attention from buyout investors. Between January and June this year alone, the total value of deals amounted to £1.4bn, the highest level since 2013.

Management buyouts (MBOs) continue to remain the preferred transaction type for private equity investors, although there is a notable rise in the volume of secondary buyout activity. Additionally, while investment focus remains biased towards private equity’s “heartland” sectors (such as business support services and retail), the report also shows that high growth markets, such as energy and environment, remain largely un­tapped by lower mid market private equity funds.

These figures underline both the quality of Britain’s small and medium sized businesses and the opportunities presented by a recovering economy to build, scale, and create value; all while remaining more resilient than global corporations to the macroeconomic headwinds over the past six months.

Lyceum, which specialises in backing smaller, growth companies, said that the report also shows a returning appetite for small to medium sized businesses within the public markets; with three exits by IPO this year. Andrew Aylwin, Partner at Lyceum Capital, said “Britain’s small and medium sized companies have always been a strong feature of private equity led mergers and acquisitions activity. These figures show that this trend is accelerating, most notably at the smaller end of the market where private equity often has a greater opportunity to drive transformational growth, value creation, and investor returns. Our own experience has also shown that companies at this scale are more insulated from macroeconomics and more able to change course if market conditions do become more challenging.”

Scott Moeller, professor in the practice of finance at Cass Business School, predicts that by the end of 2015, a pattern of continual growth will be apparent.

“Driven by consistent back to back activity for both realised investments and exits in 2013 and 2014, we expect 2015 to be the third year in a cycle of strong private equity activity,” Moeller stated. “Indeed, lower mid­ market activity has been remarkably consistent in the past two year, with less volatility than any other equity and financial markets. Despite the recent macroeconomic shocks around the world, the UK’s lower mid market is proving to be an ample supply of quality companies with strong management teams that make use of private equity investments to drive organic growth and buy and build strategies.”

Its clear from this that the UK Small and Medium sized enterprises are proving to very resilient in their growth and that private equity investors are increasingly seeing potential and opportunity in the market despite volatility in global markets in recent months.

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