There’s been a lot of global economic uncertainty in recent months, but it appears that investors remain unperturbed by it all.
A report published by law firm Herbert Smith Freehills (HSF) earlier this year showed that businesses are as keen as ever to make cross-border deals, building on a record-breaking year for M&A in 2015.
This is certainly reflected in KBS Corporate’s recent workflow. Since 2013, we’ve seen the number of completions increase by almost 30% each year, culminating in a near 165% upturn in the average value of deals in 2016 (compared with three years ago).
We fully expect these figures to improve even further in 2017.
How is the economy faring heading into 2017?
While we’ve already established that investors are not necessarily being influenced by uncertainty in key global markets, it’s still worth assessing the economic outlook for 2017 in the UK and overseas.
The International Monetary Fund (IMF) recently predicted global growth of 3.4% in the New Year – up slightly from 3.1% in 2016. This, the IMF stated, suggests that the world economy has “moved sideways”.
Nevertheless, despite so many challenges, things seem to be moving in the right direction on the domestic front.
The Office for National Statistics revealed that estimated gross domestic product (GDP) grew by 0.7% in the second quarter of 2016 – revised upwards from previous forecasts. Crucially, this represented the 14th consecutive quarter of positive growth (stretching back to the first quarter of 2013).
In addition to this, credit ratings agency Moody’s has predicted an upturn in government spending in the coming 12 months, which should help to boost GDP even further.
The falling value of Sterling isn’t the end of the world either, it appears. PwC has suggested that the decline of the pound could prompt a boost in net exports, which could help to shrink the UK’s current account deficit in the longer term.
All in all, in spite of the negative press, the outlook for the global economy isn’t as gloomy as it may seem.
Why will investors be more active in 2017?
Research undertaken by KBS Corporate in 2016 found that an overwhelming 94% of Private Equity and Venture Capital Houses were confident about the long-term future of the M&A market and the wider economy in general.
This came shortly after the outcome of the EU Membership Referendum was revealed, and the findings also showed that 97% of the survey respondents would continue to deploy their funds at the same rate for the rest of this year and going into 2017.
Simon Daniels, Director at KBS Corporate, explained why the number of acquisitions will continue to pick up next year. He commented:
“Our research also found that respondents were of the opinion that a fundamentally profitable business is an attractive acquisition no matter the circumstances, indicating that 2017 may well be in line with record levels experienced in 2015.
“Acquisitions of ‘UK centric’ businesses, whose operations are unaffected by the European Union, are also likely to continue at the current pace going into 2017.
“Meanwhile, UK exporting businesses are becoming increasingly more attractive following the recent depreciation of the value of the pound against other major currencies. The effect of this is cheaper UK imports for foreign businesses and consumers, which has accelerated demand.”
Are there any specific industry sectors to look out for?
According to recent reports, it’s clear that business owners in certain sectors can expect a flurry of M&A activity in 2017.
Three that stand out in particular are:
- Financial Services
- Information & Communications Technology (ICT)
Simon Daniels explained: “Following an initial shock as a result of the EU referendum, activity levels within the financial services sectors are recovering, with an uptick in inbound investor appetite set to be driven by a weaker Sterling and continued interest in the UK buoyed by solid growth prospects.
“An increasing reliance on, and more widespread use of technology has given consumers much wider access to financial services such as insurance and banking. The disruptive influence that technology has played in the UK financial services market has also had a positive effect on M&A within the ICT sector, which saw an increase of more than 17% in total deal volumes during the first nine months of 2016 compared to the same period of 2015 [according to Experian].
“Findings in the same report have also shown that the construction industry has experienced an increase of almost 25% in the total number of deals compared to 2015, with the past few months seeing a number of the sector’s ‘bigger players’ reporting robust performance results accompanied by a generally positive outlook for the foreseeable future.”
Why will the New Year be such a good time to sell a business?
As discussed, investors are set to become more active in 2017, which obviously means that anybody hoping to sell a business will have a larger pool of potential suitors to negotiate with.
With more competition, it stands to reason that you’re more likely to get the price you’re looking for when selling up.
Simon Daniels explained why 2017 will be the perfect time to sell a company.
“Now is the most tax-efficient time in recent history to sell a business as Entrepreneurs’ tax relief, which grants business owners a preferential capital gains tax rate of just 10% on business gains of up to £10 million, has been extended to include long-term investors, whilst capital gains tax has been slashed by 8% for all business owners.”
The perks of “Investors’ Relief”
“Previously, individuals would have also been required to be employed within the firm and hold a stake of 5% or greater in order to claim a £10 million lifetime allowance at the reduced rate. However, under the new changes which are being referred to as ‘Investors’ Relief’, the provision has been extended to all long-term investors with shares in privately-owned companies.
“This could potentially pave the way for a new type of mainstream investment, with investors now provided with a greater incentive to invest in SMEs and subsequently benefit from the rewards of a reduced tax liability.”
M&A is still at the top of the agenda for businesses
“Companies are prioritising their capital for M&A amidst a supportive environment for companies looking to acquire. In a low organic growth environment with a historically low cost of borrowing and high availability of funds for M&A, acquisitions are seen as very much a growth strategy for corporate brands.”