2023 looks set to be a better year for M&A activity, after deals fell significantly in 2022. Data from PwC show that the UK saw 4,232 M&A deals across 2022, compared to 5,033 for the previous year, representing a 16 per cent decline.
Whether we will see new records set this year remains to be seen but the market appears optimistic.
A survey by law firm CMS of 240 corporates and 90 PE firms based in Europe, in the Americas and Asia-Pacific about their expectations for the European M&A market in the year ahead finds that almost all respondents are currently considering M&A, with only 12 per cent not doing deals this year.
This stands in contrast to the findings in CMS’s 2021 and 2022 surveys where, 33 per cent and 65 per cent respectively were not considering M&A. In 2020 this figure was as high as 65 per cent.
Despite the optimism, however, nearly nine out of ten (87 per cent) of those surveyed by CMS believe financial conditions will become more difficult, with nearly half (45 per cent) expecting it to be much harder to secure finance.
This tougher outlook comes as central banks seek to control rapidly rising inflation by increasing interest rates, borrowing becomes expensive, while traditional lenders get choosy about who they want to work with.
For the small and medium enterprise (SME) sector, this presents challenges as they compete with larger borrowers for a slice of the pie.
However, the alternative lending market has rapidly risen to fill the gap left by traditional banks, and among them is ThinCats.
In 2022 the lender provided GBP302 million of funding to businesses and has lent more than GBP1.3 billion in total.
It is the first alternative lender to lead Experian’s annual table of M&A debt providers, beating HSBC which has held the top spot for years.
Ravi Anand, managing director at ThinCats, says: “SMEs are operating in no-man’s land when it comes to securing acquisition finance. Banks don’t want to lend a moderate amount to businesses through leveraged finance, and the amounts SMEs want to borrow is too much for unleveraged borrowing. So that’s where we come in. We lend to those businesses that don’t have assets and that are borrowing a few million pounds.”
Anand says that in the B2B service sectors to which they lend, M&A volumes have been up since these firms are less impacted by inflation and they have high profit margins which gives them buying and revenue power.
He expects the transaction pipeline to remain strong, yet he anticipates competition among the lenders targeting the SME sector to be low.
“I’ve been talking to 30 or so banks in the last month and none of them appears interested in moving into this space. Instead, they are lending against property or assets, or they are lending to micro businesses.”
Anand continues “From a regulatory risk point of view that is an easier thing to do because you have asset backed or lower lending, so we don’t see the competition coming in.”
Anand says ThinCats will continue to lend to SMEs in “resilient” sectors and says that despite the macro headwinds, he expects 2023 to be another bumper year.