Monitoring mid-market M&A in the UK - 2025

Welcome to the latest edition of the Trowers Monitoring Mid-Market M&A in the UK report. 

Introduction

This year, we reflect on a quieter-than-expected 12 months for UK M&A activity. Despite predictions, the anticipated bounce back from the boom years of 2020 and 2021 did not materialise. However, 2024 was notably more stable after a rocky period, with dealmakers navigating high inflation, rising interest rates, and supply chain disruptions.

Political uncertainty, particularly around the general election and Labour's first budget in 14 years, continued to dampen M&A activity. Our analysis, based on comprehensive data from S&P Capital IQ, reveals a flat year with 180 mid-market deals, consistent with 2023 figures. The total deal value slightly decreased from £11.4 billion in 2023 to £10.8 billion in 2024, with the average deal size dropping to £30 million.

Despite the challenges, we are optimistic about 2025. The relative stability of the economic and political landscape suggests a potential uptick in dealmaking. Private equity firms are showing signs of gearing up for more activity, and our pipeline indicates a busier year ahead. We look forward to helping clients unlock growth and capitalise on business opportunities in the coming months.

2024 a year in numbers

Factors driving dealflow

UK mid-market M&A activity has not returned to 2021 levels. Inflation post-Covid has prolonged the reset. Investors remain cautious, but stable economic conditions and government policies may ease concerns in 2025.

Investor optimism stirs 

• Early 2024 optimism - fundraising picked up, and buyers prepared to transact.
• Election impact - the May election announcement paused activity. Post-election, business leaders awaited Labour's first budget.
• 2025 outlook - Relative political stability appears to be encouraging activity. The valuation gap between buyers and sellers is closing, and deal pressure is building.

Government policy beginning to take shape

• Policy direction - Labour's growth plans are emerging. Changes to Business Asset Disposal Relief will impact Q1 2025 activity.
• National insurance changes - employer national insurance rate changes affected valuations, challenging deal appetite. Effects are expected to be digested by Q2.

PE gears up for deals

• PE activity - private equity funds were less active due to rising interest rates. However, PE involvement in deals increased in 2024.
• Financing availability - institutional investors with good track records found financing more available. Bolt-on acquisitions were common.
• 2025 expectations - PE firms have dry powder and assets to exit. Increased activity is expected.

Labour markets remain tight

• Skilled labour shortage - mid-market businesses face a talent shortage, pushing up salaries. Brexit and increased national insurance contributions add to challenges.
• Labour reforms: new employment rights reforms impact businesses. Further government steps are awaited.

Deal structuring offers way forward

• Creative structuring: earn-outs, deferred consideration, and warranties/indemnity insurance help bridge valuation gaps and overcome liquidity challenges. These tools will remain vital as markets rebuild confidence and embrace a sustainable rebound.

Outlook for 2025

Businesses can look forward to 2025 with more certainty than last year. Despite some unknowns, a steady recovery is anticipated as investor confidence builds and capital deployment increases. The new government is under pressure to deliver a growth strategy to revive the economy, with positive signs emerging despite recent economic contractions.

Inflation is under control, and interest rates are expected to fall, albeit slowly. This stability should boost M&A volumes. By the end of Q1, businesses impacted by national insurance hikes will have adjusted, leading to increased deal activity. The UK may also attract more foreign investment as the impacts of the Ukraine war and Brexit are digested.

Dealflow is expected to rise among owner-managed businesses, driven by changes to Business Asset Disposal Relief and other usual factors like succession planning. Private equity firms, with assets to sell and capital to deploy, are poised for increased activity. The last 18 months have been quiet for private equity, but a pickup is expected due to pressure to deploy capital.

While challenges from 2024 persist, transaction teams are likely to be more active. Buyers in 2025 will proceed cautiously, focusing on thorough due diligence and risk-averse structuring. Overall, cautious optimism prevails, and we look forward to supporting our clients through the year ahead.

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