The inflationary and interest rate environment in the UK and overseas resulted in some acquirers becoming more cautious, but what is the current situation, and what is the outlook?
In this episode, we hear from Senior Economist at Lloyds Banking Group, Rhys Herbert, who discusses the economic outlook, and what the next 12 months could look like.
This is followed by a panel discussion where David Andrews, Investment Director at LDC, and Paul Winterflood and Mel Reed of Moore Kingston Smith, explore the impact of the current economic situation on the M&A market, as well as the impact on transactions from a commercial and tax perspective.
#sellingmybusiness #agency #corporatefinance
Welcome uh to our webinar on economic Outlook is now the right time to sell your agency and this is the latest in our um series of selling your businesses and it’s great to see so much interest in this morning’s topic um hopefully reflecting the high level of interest um
And for many of you who are regulars um continuing to find the content um really useful so for those of you who aren’t so familiar with this more Kingston Smith is a top 10 firm of accountants tax and corporate finance advisers we work with businesses across a vast range of
Commercial sectors including not for profit and Private Client as well and in our Westend office we’ve got eight partners and around a 100 people specializing in working with media marketing Services film TV theater anything that comes under that media marketing Services bracket um or on naturally with a bit of tech Media Tech
Thrown in there as well and then we have a media specialist Corporate Finance team and they specialize in m&a um particularly saleside advisory um taking sellers through the entire sales process they do a lot of strategic growth Services um helping businesses to get into shape in in the run up to a sale
And a lot of financial due diligence as well acting um for buyers and private Equity groups uh 2022 was a record year uh for moreing Smith media Corporate Finance team and we did 19 deals um highlights of that was the sale of 20 Red Cap Gemini and also the investment by
Coniston Capital into CRC we’re also part of more Global which is an international Network we’ve got presence in over 100 countries so very well placed to help clients with their International um growth aspirations and also their International m&a as well so today we’re going to be looking at the
Impact that the current economy has had um and is still continues to have on the m&a market and we’re going to hear the latest forecast for the economy and then discuss what we’re hearing from acquirers um investors and agency owners um as well as what we’re seeing on particular transactions that we’re um
Involved in so I’m delighted to be joined by ree Herbert he’s senior Economist at Lloyd’s Bank um and also David Andre LDC who’ll be joining my colleagues from more Kingston Smith um Paul winter flood who is head of um media m&a and Mel Reed who is an m&a tax
Partner and I think it’s going to be quite an insightful jam-packed hour um with their views and perspectives on what they’re seeing at the minute so before I hand over to ree to kick things off just a couple of housekeeping points the webinar is being recorded So do
Share with any peers colleagues or friends who are unable to make it um in Idea World we have a lively conversation and You’ all chime in with your questions but please do put them in the Q&A function it’s much easier keep track of them in the Q&A function um and
Lastly there will be a short survey at the end so please do fill that out it’s super useful in helping to shape future seminars so so firstly delighted to have um ree Herbert with us today and he’s going to give us the economic backdrop to start with he is a senior Economist
As I said at loy’s bank and he’s responsible for analyzing and forecasting Trends in major economies he joined L’s he joined Lloyd’s Bank back in um 2011 and prior to this he worked at the economic consultancy Oxford economics where he headed up its industry forecasting service and he’s
Also worked for the office of national statistics credential Assurance Corporation credit lonise bank and the National Institute of economic and social research so thank you very much um over to you ree okay yeah thanks very much Esther and uh welcome everybody um what I’m going to do is just talk for a few
Minutes about uh we could move on to the next slide please I’ll just talk for a few minutes about uh the economic Outlook um um um and in particular I’ll focus on the potential outlook for uh inflation economic growth and interest rates next slide please I think the first thing to say is
That we are living in extraordinarily uncertain times um what I’ve shown here is uh an index of economic uncertainty which is basically based on newspaper searches globally about the you know the number of times that the words uncertainty are used in conjunction um with um uh stories about the economic
Outlook and you can see that ever since um the brexit um you know there seems to been a step up um in this economic uncertainty index you know reflecting um what has been you know a series of glob of of economic shocks and many of which have been
Global um and you know I think um this in some ways is not particular but I think it is worth that it just means that you know right now the the level of uncertainty about what is going on the economy is particularly high and we need to you know take any uh
Sort of forecasts about the economy of pinch of salt but what can we say with confidence about what’s going on in the economy and let’s first of all look at um the inflation background so next slide please what I’ve got here is a couple of charts that show what’s been going on uh
With inflation and the chart on the left hand side first of all um shows recent performance Consumer Price inflation uh both in the UK but also elsewhere as well and you can see um first of all over the uh in 2021 and certainly in 2022 there was a sharp rise in inflation
Not only in the UK uh but globally we saw um multi-year highs in Consumer Price inflation um now what that suggests is um inflation was being driven by global factors and you can see um in the chart on the right hand side where we’ve split down uh the sort of
Rise into you in UK infl into some specific factors at food prices Energy prices other Goods prices and service sector prices you know what was going on on the inflation side and it was primarily these Global factors um that were sort of result of um both covid and
The only even recovered from covid but then the Ukrainian Russian situation um that has led that principally led uh to the rise in inflation now the good news is uh that these factors are now um going away and as a result we are seeing sharp Falls in inflation again you can
See in the chart on the left hand side that that’s not only true with the UK um it’s true globally as well in fact inflation in some countries notably the US has been going down more um more quickly than in the UK um but we also
Seeing you know better news on the UK side as well um we had the latest figures uh for UK inflation today uh which showed numbers for October and that showed a big fall in headline inflation uh to below um 5% um which basically means that inflation now is less than half of its
Peak rate of late last year and also a more moderate fall in core inflation as well so inflation is on the way down and we’re expecting it to fall further by year end uh we think inflation could be close to 4% uh next year we’re expecting
Inflation to fall back um to the Target rate of two and two and a half% so much better news on the inflation front if we can move to the next slide please um and as a result of that the interest rate environment interest rate environment is changing um you know we
What we’ve seen um over the last couple of years is really big rises in interest rates again not only in the UK uh but globally I’ve shown on the chart here what’s happened to interest rates in the UK um the Euro Zone area and um the US and
You can see that you know interest rates have moved highest LS um you know since uh 200 um8 uh now even if inflation hadn’t gone up we probably would have seen a more Des rise in interest rates but you know central banks the equivalent of Bank of
England has you know felt that it response to uh this big Rising interest rate they had to react by raising interest rates now the good news here is that interest rates have probably peaked not only in the UK uh but other economies as well and you know the talk
In markets is now moving on to you know how quickly will interest rates come down okay we suspect that they won’t come down anywhere near as quickly as they went up but you know we do see the possibility of interest rate Cuts uh next you in the UK and elsewhere but
That will depend of course on whether inflation continues new to come under control and I just want to talk you know about a couple of risks on the inflation side before I talk about um the growth Overlook so next slide please now I would point the two upside
Risks on the inflation side the first one is potentially oil prices um you know we I keep I kept going on about the number of you know economic shocks we’ve seen uh globally and of course the later shock um is the uh this new Middle Eastern crisis in response to that we
Initially saw a rise in oil prices but because the so far at least the Middle East crisis has been relatively contained um the oil prices fall and backck after an initial Spike higher U now that’s clearly good news uh from an economics point of view but I think
There’s still a risk um that if the global that the uh Middle East crisis um sort of spreads more widely we could see um a further and significant rise in all pric prices which would raise upside risk for inflation so that’s the first potential Global upside risk but I think
The bigger upside risk is a domestic one um when I talked about the reasons for UK inflation going up I initially talked about it being a result of international factors and I think that’s true U but what we did see last year as well is a sort of rise in domestic inflationary
Pressures um in the service sector reflecting the tightness of the labor market and the fact that um um we Wes were Rising quite sharply you can see in the chart the right hand side here you know just how quickly wage growth is rising right now it’s round about 8% um
Year on year um the latest numbers did show a modest fall in UK inflation in uh UK wage growth and there do definitely does seem to be now evidence of the UK labor market rolling over um and becoming less tight but I think this still represents an side risk lots of um
Employers are still telling us um you know that they’re having difficulty recruit in or retain in staff and as a result they’re having a pay up you know in terms of wage increases so you know this is definitely a factor that needs to be watched in terms of whether
Inflation can come under really can come under control so that’s on the inflation front now first of all what’s happening on the growth front uh next slide please now for much of this use um economic growth has been um somewh stronger than expected both in the UK
And globally um at the start of this year there was lots of talk about the UK economy being recession in this year and there was talk about output Falling by 1% now so far that hasn’t happened in fact you know it looks like the UK will
Have grown modestly um this year um but there are not now definite signs of economic activity rolling over in both the UK and the US used I’ve put a couple of indicators up here that first of all show um you know that after a good start of the Year both UK um activity
Indicators also in activity indicators elsewhere you know have turned down and also it’s notable that you know an initial downturn in the UK manufacturing sector now seems to be spreading more widely and and UK’s service sector is coming under um pressure as well uh next slide
Please and I think one thing that in particular we would note is that um we probably haven’t seen the full impact of um you know the past Rises and interest rates in the UK as yet and one factor that we need to bear in mind is the changing way that the mortgage Market
Impacts on the economy um in the past um you know most mortgage rates uh were variable rates so that meant um that as soon as the bank of England raised interest rates um the mortgage rate that uh people would be paying immediately changed uh now of course the mortgage
Rate Market is mainly fixed rate around about 80% of the mortgages fixed rate mortgages um but you know they fixed rate mortgages are relatively short duration um that means that um that households at sometime or other have to refinance um their mortgages and uh and the likelihood is that you know many
Will have refinanced this year um or will have to refinance by the end of the year early next year and will have finan at higher interest rates so this is a potential hit still uh for to um to come through to the economy and I think reinforces our concerns about near-term
Downside risks um for the economy uh next slide please so what is likely to happen on the growth front well you know we are still hopeful that the UK economy can avoid a recession um but it’s going to be a close run fin um what we are going
To probably see um in the winter and through the spring um is pretty stagnant growth um in the the UK economy and indeed in the global economy you know as a whole um um things could get better by um by the spring of next you uh but the
Near-term risks are on the downside for economic growth now what does this mean for interest rates well as I said earlier we think interest rates have clearly peaked um in the UK economy but there’s a lot of uncertainty about how quickly they’re going to come down and that’s reflected in financial markets um
Of late there’s been a lot of volatility in bond markets and and you can see that reflected um in this slide interest rates have gone up Market interest rates have gone up quite sharply and over the last few weeks they fluctuate very sharply as um as sort of as Market
Participants weigh up the likelihood um of rates coming down and how quickly are they coming down um they it um over the last two weeks there has been some growing optimism um of uh that UK interest rates could start to come down by the middle of this year but sorry the
Middle of next year or possibly even sooner and if you look at the market response um to today’s uh news on inflation uh markets are now talking about the serious possibility that interest rates could come down as early as uh May of next year um I would say
That um you know our official forecast actually was that interest rates wouldn’t start to fall until right the end of next year but I think you know recent news on inflation has been somewhat better than we expected so I think that does Point um to a risk of
Interest rates for a little bit sooner uh than we expect um but don’t expect interest rates to come down um as quickly as they went up um you know we will see more death Cuts in interest rates um but I think the bank of England will be relatively cautious um about um
How quickly they cut interest rates um next slide please so just to sum up um where we are um you know we’ve obviously gone through a very difficult period for inflation but we now do seem to be coming out at the other end of it um inflation in the
Latest numbers has come down quite sharply and it’s likely to come down further and by the middle of next year we’ll be much closer to the growth Target uh that’s good news on the interest rate side um there are near-term downside risks for economic growth um we are hopeful that we can
Still avoid a genuine recession but certainly over the the next six months um you know the growth Outlook looks precarious on the interest rate side um you know I think we have got better news ahead you know it does look like now that UK interest rates have peaked and
That they will start to come down next year I think the bank of England will be cautious about cutting rates but given the sort of better interest rate environment they probably will have some rate cuts at next year and I think the chance risks are increasing that those
Interest where Cats Could Happen earlier than in the year than was previously inspected and and actually could even start uh before the middle U of next year and so perhaps I’ll leave it there now and turn fince back to Esther lovely thank you um very much ree
Um I think there was was enough good news in there for us to be feeling a bit a bit positive about things to come but yeah a shame a shame for many that they’re not interest rates aren’t going to come down quite as quickly as they
Went up so um next up we’ve got um Paul winterflood who I said is head of media um m&a at more Kingston Smith um Paul’s going to be providing the latest m&a market update um covering the latest de activity and do watch out also for our full m&a courtly report which should um
Land in your inboxes shortly after this webinar and that will go into much Fuller detail around the key sub sectors of interest for investors and notable deals from Q3 so over to you Paul thanks Esther and thanks ree as well that was uh really insightful um so I’m
Going to as as to mentioned I’m going to um do a a view of the M m&a Market look through some of the trends and notable transactions over the past few quarters um as well as a look do an outlook on the on the period um
Ahead so just quickly for those of you haven’t joined before just a um just just a to talk through the basis of our analysis so we track um all the deals in the um in the media space in the in the UK which involve either a UK buyer or a
A UK um a UK seller and that forms the basis of our ongoing analysis as well as our quartly reports and and webinars such as such as this um if we roll back 12 12 months ago we were in a very hot Market um it had been the case postco
And as you can see from the from the left hand side of the chart that s of deal of activity uh ramped up um ramped up by quite quickly um I think the one of the one of the points that really resonated with uh with with me from
Reese’s ree’s um comments was about the the sort of Perma crisis that’s been um in place since 2016 I think we’ve been we’ve been doing our sort of courtly reports since then and pretty much every quarter we’ve been talking about uh well if only we if only there can be a bit
More certainty in the next quarter uh but despite all that um the the m&a market has been has been pretty healthy in the in the in the media space um if we roll back 12 months we’re certainly starting to see some macro economic head headwinds Tech sector was glow was
Slowing down it was even worse than the UK thanks to Liz truss’s bu budget and so we were seeing the cost of money going up anecdotally we were seeing buyers put investment plans on into UK on hold and then we were sort of and then at the start of 2023 things like
The ACT strike and reduced ad spend will hardly helping helping the market so us and the broader deal Community were quite nervous about 2023 um the first half of the year was was a lot better than expected volume wise and actually 926 deals is still um is is is still a
Pretty pretty good level of um activity um and and particularly those deals we seen in in the lower mid market so those are deals under under 5050 million pounds so for a lot of independent businesses and independent agencies um there’s there there’s definitely is activity there um but the
Market is is definitely tough um there is also a bit of a lag on on on on deals in terms of the the length of time it takes for um deals to be agreed and then to show um to to progress to completion and probably the average amount of time
Is probably three to six months um so I unfortunately would would would anticipate that there to be a further drop in the activ in the in the numbers anyway in in quarter four but um I think off the back of um of V’s um Outlook I think that aligns with s of our
Expectations that um the second half of next year in particular we should see things um see things picking up um the second line on the chart is the percentage of deals that have private Equity involvement and that’s been at a pretty consistent level now um probably post postco and um particularly
I think since 2019 really when um private really started investing in the U in the space I think the the take home here is that the chances are you’re going to be in acquired by private Equity either directly or indirectly um because they make up such a um such a
Such a large amount of the of the bio pool and and that’s despite interest rates being um being being High um when there’s a higher interest rate environment it’s more challenging to construct transactions in um particularly when there’s a large amount of debt in in in deals so it’s still it’s still promising
That there’s there there’s such a that this that that indicator has has has remained High and um deal deal activity is still is still relatively High compared to um compared to the long-term norms and I’m sure D will have additional views but certainly our our view on the market is that the the
Presence of private Equity is certainly a good thing that professional deal do is as long as the the target is trading well this certainly will be the appetite for investment to um to continue so this next chart just looks at some of the capabilities that are are
Being Acquired and I just draw your attention to uh a couple here just focused on the on the marketing Services um element within our within our within our analysis um toot spot has been and and this has been popular for quite a while but e-commerce capabilities took to to top
Spot this quarter um certainly those capabilities continue to be sought after um post the co boom they’ve been um e-commerce has certainly been at the at the top of many acquirers lists and I think that’s very much here to here to stay is Brands looking for ever more
Innovative um innovative solutions uh um to to deliver to their their clients second place was advertising um I think that’s been which is I think is an excellent an excellent thing for the uh the the creative Industries as a as a whole and that’s again has been a trend
Of of recent quarters and despite the clamour for digital capabilities such as e-commerce Performance Marketing um creative skills are always sought after and and highly valued which is which is pleasing to see that demand reflected in the in the in the m&a activity and for those of you
That are attending our annual survey event um later in the later in the month um the the importance of of creativity is going to be the the focus of the uh of our panel discussion for that for that reason just looking at a few um notable transactions um that have happened in in
In in this quarter and we’ve we’re highlighting four here and all of them are prettyy pretty significant um deals so first of all we got uncommon um they were um acquired by um Havas um for a valuation of 120 million um denu acquired tag for half a billion dollars
Brain Labs were invested in by um by ferious Partners valuation of $20 million as well so these are these are Big transactions um that have been that have been that have been completed I think there’s a few things to to note here firstly um the four of those are
Are network Acquisitions so the networks are acquiring again um where there’s um where there’s where there’s quality they’re looking to uh looking to acquire um secondly um it shows the quality cells regard at high prices regardless of the um regardless of the macroeconomic backdrop um and lastly the
The brain labbs fur’s deal and we’ve mentioned previously for those that joined these webinars before that uh the concept of private Equity secondaries so that’s where a um a private Equity house will typically invest in a business they’ll come to the end of a investment
Cycle and at the end of that cycle um typically they will either sell the business onto another private Equity house or they will um sell that business typically to a to to a trade buyer um when I mentioned that a lot of private really started getting into
Geted started investing in the sector in about 2018 2019 and So based on a sort of a three to five year investment time Horizon there’s that there’s a there’s a Quee of um um businesses that are are going to be are going to be going through that um brain Labs was one msq
Um um in in quarter 2 was was another one and the fact that they’ve gone to another private Equity health is a is a is in terms of the m&a market is certainly a very uh a very a very positive thing in in our view it gives
Us comfort that the market is going to be strong over the medium term is these businesses both brain labs and msq were executing buy and build strategies so um the the the fragmented Mar the fragmented buyle we’re seeing in the um in the media m&a Market is is is is
Going to continue for the for the medium ter um so just in summary um the the market is the market is down at the moment yes but I’d say that’s more of a more of a salside problem I think if it’s a um for businesses that are
Trading well there’s lots of well funded acquirers out there looking for opportunities um there’s been a there been a Perma crisis for the last 20 since 2016 so acquirers are used to dealing with with uncertainty um and for transacting through uncertainty so if you’re a seller that’s trading well got an
Incentivized management team a growing good value proposition then actually perers it could be quite a good time to sell because acquirers are certainly seeing left transactions or left quality opportunities but they still want to do deals so um that’s the probably the the shortterm Outlook and then the
Medium-term Outlook is um when macro when the macro economic um environment stabilizes we’ve expecting to see a a a strong markets um returning so um that’s the end of the m&a update so back to you Esther thank you Paul thank you very much um so now I’m delighted that Reese
And Paul will be joined by David Andrew and Mel Reed so if we can all all turn our cameras on now um Mel is an m& tax partner at more Kingston Smith and works very closely with Paul and I um across numerous MMA transactions in the media
Space David Andrews is a partner at LDC um and works very closely with management teams across London helping them to realize their growth Ambitions with the support of a private Equity partner and since joining LDC in 2011 he supported a number of the firm’s high-profile Partnerships including Bliss Headland right spend crowd FC
Business intelligence ocean outdoor blue Rubicon and 24 and he also continues to support businesses such as Blu-ray traveland igloo.com he’s a specialist in media digital and the technology sectors um and he joined LDC from Global consulting firm um monitor deoe so um I’m going to lightly chair a panel
Discussion um like I said it will be more lively if people can contribute questions but please do pop them into the um Q&A function and then I will weave them in to the questions as we go so I think starting off with you David um since you haven’t had an opportunity
To speak yet um how are your portfolio companies in the media sector sort of navigating this uncertain economic landscape at the moment thank thanks Esther I think you know it’s undeniable and ree’s update you know emphasizes that the you know like all sectors uh you know macroeconomic headin are affecting our our
Portfolio um we have about a dozen media focused businesses in the LDC portfolio today um and and you know it’s not a secret that those portfolio will have lower growth rates at at a Topline level in 2023 than they were perhaps trending on for um you know the focus for LDC as
An investor is that we we fundamentally back management teams so while as as you rightly introduced me I’m a specialist in in the media and digital sectors I’m an investor first and I’m by no means a sec an expert you know we look to partner with management teams who are
The experts and have the capabilities to drive their businesses forward so you know fortunately despite you know macroeconomic difficulties the overriding performance of our businesses is much more micro driven is and and and it’s focused in on the adaptability and and capabilities of the management teams
That we that we partner with so while growth rates will be will be lower in 2023 you the majority of our in fact I think all of our media portfolio will be growing ahead of the market underlying growth rates which is a fantastic position to be in that’s down to you
Know identifying opportunities even in difficult markets wherever they may occur and and and that adaptability of management now a lot of our businesses you know as Paul alluded to with with private Equity models are on buy and build strategies anyway some have pivoted towards buy and build in 2023 to
Identify new growth opportunities and we’re very supportive of that um on the on the other side you know a private Equity partner such as LDC can allow management teams to be a little bit more flexible you know in making investment decisions so if the right thing to do
This year has been to focus on operational improvements or open up new markets or in in in invest in new new products alongside considering m&a that’s that’s strategies we can support you know and back the management teams to to to deliver on giving themselves opportunities to you know Drive growth
Even in a difficult Market I mean have you seen any sort of notable notable differences and how different sectors and capabilities have responded to the economy um so as an investor with with seos our portfolio you know across the UK across UK businesses worlding Maps UK GDP you know there will be differences
Across you know U kind of major sector groups but again I go back to the same theme within all of that it’s a focus on management and and identify opportunities for growth within within media again a portfolio is relatively broad um and I wouldn’t say you know
From that you can draw out any any any particular Trend if there is one to draw on I think the whole sector especially marketing Services is benefiting from you know rapid digitalization uh one from you know the work that could do but also you know the complexity that being brings to clients
In navigating the ecosystem in which they in which they operate so you know businesses need to have a you know digital and Technology story not necessarily having an answer to Ai and and uh and and but but within that you know Automation and understanding where they are on their technology journey and
How they’ll make take advantage of that in the medium term and that’s giving them an advantage you think yeah I think absolutely well I think if you don’t have that you’re at risk of you know losing ground against your competitors who are being more Forward Thinking and Paul is that reflective of
The clients that you’re working with I think definitely yeah I think the this the the lower growth rates is certainly something that that we are we have that we’re seeing across the across the portfolio um I think the the points in the year where there’s been where there hasn’t been a
Uniform um drop off in in activity levels and um a a a uniform um point where everyone’s been struggling I think we’ve seen different uh people with different exposures to different sectors and verticals um going through sticky point at different points in the year um I think particularly
Those with um with that have a lot of tech clients for instance they first half of the year in particular they found that pretty tough those involved in the uh in in production and those linked to the act of strike uh I think had exposure to the actor strike for
Instance that had a they they were um they they they found it difficult at a certain point um I think one thing that’s um sort of universal almost has been people have found new business a lot a lot tougher um decisions being delayed um but having said that we found
That clients are still growing have had a lot of success with account development in particular um which is a sort of a great way to great way to grow and a uh far better from a margin perspective than an expect than expensive pitch process yes pitches in this sector are
Very very expensive so if you can avoid those then that’s a win-win win-win on the margins um so reee I mean when do you think the economy will be on a more even kill and I guess more importantly how soon do you think that’ll actually start feeding through to businesses
Because there’s always a time lag in these things isn’t there well I think by the the spring or the middle of next year um you know I I think by then we should see fins on a more even kill as I’ve mentioned you know we we’re expecting inflation to
Come down sharply further uh by then but I think the important thing is not just that headline inflation comes down but that you know the bank of England you know clearly sees that these domestic inflationary pressures by the lab from the labor market are under control um I
Think by the um the middle of next year it should be clearer whether or not that is the case and we think it’s likely most likely that will be the case um also by then um you know we should have seen the Fuller effects of interest
Rates on the real economy by that so hopefully by the middle of next year we’ll see a a sort of um a situation both where as inflation stabilizing at much lower levels than we’ve seen over the last couple of years and um a situation where economic growth has been
Leveling off has leveled off again and and obviously those are both positive factors and you know by then as well we’re expec to see the start of interest rate Cuts in the economy as well which will act as a sort further support to economic growth so I I think by the the
Spring or certainly the middle of next year the economic environment will feel a lot more positive but I’m not sure if it will do you know over the next few months over the the winter months I think we’ve still got some some tough W headwinds ahead
In the next few months yeah no I have I have no doubt Paul how are you seeing that sort of expectations flowing through into the m&a market into what sort of potential buyers and private houses are doing I think from the m&a market as I as I mentioned there’s a lot of appetite
Generally is is is strong there’s there’s there’s funding in place for be people to be able to do deals and there’s a fragmented uh buyer buyer pool at the moment which is a which is certainly a very very positive thing um the challenge is is turbulence and turbulence is affecting both buyers and
Uh buyers and sellers um what I mean by turbulence is like trading dropping off um clients being lost um that probably has more of an impact on the sell side because you’re typically smaller um if you lose a if you if you lose a like you
Lose a client it’s like to be a bigger proportion of your um of your of your of your profitability or if you’re growing at a slower rate then um that has more difficult that has valuation that creates valuation um valuation challenges um so that’s definitely inherent in the in the Market at the
Moment I think on the buy side it’s potentially like I think private Equity are looking to looking to do deals and they’re less they’re they’re not impacted in the same way as a as a as as as a trade buyer uh by that by that volatility and
Guess wait we’ll wait to illustrate that was I heard about transaction a few weeks ago where the um um it was it was close to it was close to getting completed but the the buyer um ran into difficulties in trading in in in in a different market and so their investors
Um asked them to redeploy their their resource and so um the deal uh was put on hold effectively um on the cell side it’s it’s probably more of the case that um the the impact is probably more the case that um deals are sort of stretching
Buyers are taking a lot longer to just check that they get comfortable with with the business get comfortable comfortable with the trading if people are sort of targeting a valuation level then with growth rates being slower then it it it may mean that the point when the um the valuation works from a
Profitability perspective is is a bit further down the line and because deals are stretching that just allows it creates more likelihood that something could go wrong in that intervening period which um has a knock and impact on on on completion rates um I think the
Final thing is potential on is to not is around is around valuations so I think we’re seeing a bit of a two-p speed um impact so in a higher interest rate environment um particularly with deals that are backed by debts when interest rates go up the uh the cost of doing a deal
Therefore increases and so there’s a natural downward pressure on valuations um because acquirers are seeing less high quality opportunities high quality opportunities are are probably being more fought after by a the same number of buyers that there’s a equal and opposite supply and demand impact and so those valuations have
Held it’s probably the less sort of after Acquisitions where there’s downward pressure on valuations and people and acquirers are having to be are wanting to be more conservative to to to provide uh downside protection that those valuations are the ones that’s were the the less attractive and fought after asset and sought after
Assets that are um where there is a definite downward pressure on valuations and and or if if the business is isn’t trading that well um a big question mark as to whether the business is is sellable in the first place yeah I’ve certainly got two clients at the minute where deals are on
Pause one because the acquir isn’t doing well I think they’ve got some client spend that hasn’t been committed to to not forecasting as well as I thought another because the acquirer is having a bit of a rubbish time so I think lots of different reasons um I mean David I mean
How’s all that feeding through so your portfolio m&a intentions um in terms of you know thinking about you know financing and and valuations yes I think I Echo all of all of what Paul said there you know as LDC you know we’re a little bit different to
Most other private Equity houses all of our funding comes from the balance sheet of our parent Lloyd’s banking groups so that gives us a greater deal of flexibility in how we deploy you know Paul earlier in his in his piece alluded to fund Cycles dictating you know
Activity on primary deals and and for uh portfolio boltons the you know our support from ly’s Bank means we don’t have that fund cycle so you know are much more willing to invest through the cycle so that plays to both our own intentions to invest which which remain
High and media remains a core sector for us and within our portfolio businesses to support their their own m&a Ambitions so just to put some context around that you know in in in 2021 you know we did 65 Bolton Acquisitions across the portfolio we did 45 in in in 2022 you
Know year to L this year we we’ve done we’ve done 27 so we our volumes are slightly down but not materially down from a portfolio Bolton uh point point of view you know in terms of new business activity we are seeing the market slightly depressed you know Paul
Your stats were actually slightly more positive than than what we track for our kind of core competitor set we think volumes are nearly down 50% year on year but in that context LDC is you know still done 13 deal deals this year which means we’ve probably increased you know
Our market share which demonstrates our you know willing to willingness to invest you know that said the deals we are doing are take taking longer to gen generally not always but generally taking longer to complete both Within our you know portfolios for for smaller boltons and within our our primary deals
You know that’s a function of of lots of the things Paul Paul discuss but you know needing in this economic environment to you know to do the diligence to be confident in your investment decision you know just taking a little bit longer than it has traditionally and Mel I mean are you you
Seeing any impact on Deal structuring um and what are the what are the key watch outs from an m&a tax perspective thanks Esther I mean I think sort of from a actual deal structuring perspective it’s it’s probably business as usual in terms of you know particularly in the private Equity
Sector you know we’re still seeing highly I mean highly leverage deals are still obviously difficult to do with where interest rates are at the moment um I mean I think there’s um it potentially makes it more difficult in terms of sort of any sweet Equity incentive for management coming in
Because you know with the with the interest rates um being higher you know it might be harder to achieve the um Target growth rates for them so I think incentivization of management through site and maybe through some other Equity incentive pre pre-sale is is you know even more important than ever um you
Know in this sector we’ve always sort of seen longtails in terms of earn outs or or put and call options um you know typically we would always they might have been completed within four years maybe maybe two or three years ago you know they tend to be sort of stretching
A little bit more where it might be four or five years sort of burnout period um but I think you know overall from a a structuring perspective it’s it it’s business as usual but I think sort of to Echo David’s comments you know you would look to invest in management teams and
You know in terms of key watch outs for from a tax perspective on an m&a transaction it’s about getting the management incentive structure right both from you know an investment perspective to to make sure the right people have got the right level of incentivization but also from a tax
Perspective um because I think you know what we see coming out of due diligence that does slow things down significantly ATT tax risks around shares and Equity that have been given to management and you know these are significant number tax risk numbers that can come out of
That so I think probably I guess if I was to give a piece of advice it would be you know make sure your house is in order in that because it really can and we’ve seen it on on some of the recent transactions that we’ve been looking at
Over the last 12 to 24 months um it can really um be problematic in terms of deal structures yeah yeah and what um I mean what other factors could influence the economy over the next 12 months re and what could the impact of the general election bring us
Well um well obviously one thing uh that could come out left field is another Global shock of some sort like that you know we’ve talked about a lot of this uncertainty uh being generated by you know stuff just happening internationally and not having a knock on effect on the economy you know it
Appears that you know current events in the Middle East while tragic um uh from many standpoints from from an economic point of view are so far having you know only a small effect but you know it’s possible that we could see you know a sort of uh you know that the impact of
That escalate or we could get another International shock say something that incorporates China or something like that so that’s one risk um you know GL domestically um I’m afraid there’s you know there’s risk on both sides I talked about the labor market the importance of that uh coming under control if the
Labor market remains tight you know that points to upside risk to inflation you know against that you know if the if the economy proves less resilient when they thought that implies downside risk so you know there’s definitely risks domestically um to the economy as well
Um in terms of the impact of the general election well obviously we will have to have a general election by January 2025 at the latest um you know so that means almost certainly we’ll get in a general election next year um unless the opinion PS changed dramatically I would have
Thought the government will try and push it out as long as possible so the election will probably not to the order but you know there could be knock on impacts on the economy in the runup to that um I’m really getting two broad questions about this um you know first
Of all how much difference really make to policy in the runup to the election and you know what will happen after the election I think the first important thing to bear in mind is the interest rates are set in the UK by the bank of England and they are sort of quizi
Independent for the government you know the senior people get appointed by the government but they’re not impacted immediately by the Electoral cycle or who’s actually you know forming the government at that time so the interest rate environment you know wouldn’t be immediately impacted by the general election and I think that’s important
For the economy uh but you know the but the election and the government could have an impact in other ways and one of the ways will obviously be fiscal policy um I think there is a reasonable chance that in the run up to the election we
Will get some sort of tax cuts um next week we will get the Autumn statement and the chancellor may talk about that um but he may well wait until the spring uh before he’s um uh before he talks about that there’s only limited room uh
For tax cuts but you know we could get some small tax C possibly just things like inheritance tax and stamp Duty um but I would have thought in order to make an sort of electoral Splash they might want to look at you know other things like income tax or whatever out that um
Looking at the sort of um the position after the election though you know any government is going to be you know sort of um quite constrained they they are going to face uh inherit sorry an economic environment why potentially getting better you know it’s still one
Of low growth and also one in which the government debt situation and government deficit will be very high um so against that background you know it’s going to be very difficult for governments to make major changes in policies there’s big questions ahead about um you know
How do you cope with the NHS and you know how do you cope with an aging population what do you do about low productivity growth in the UK so there’s big questions um for a government going forward but in terms of what they’re actually G able to do immediately you
Know they are going to be very heavily constrainted um wher Falls the next government lovely thank you so much ree so I’m a little bit of a my batter is about to uh go and I’m currently being rescued by somebody who’s trying to plug me in um so hopefully I’ll hold out
Before before we go so um Mel I mean what are the possible impacts that a general election could have on the tax environment and also in a weakened m&a environment what other options to entrepreneurs have thanks Esther so I mean I think um you know if we’re talking about a change of
Government then you know K starma and the the labor party have have um effectively come out and said that funds you know they’re intending to change how funds managers are are taxed you know currently they benefit um so thinking about the private Equity Market investors you know they they benefit
From capital gains tax rates um on on their sort of payout from their Investments and uh so labor are expecting uh well they’ve said they’ll change that to income tax rates so I think you know what impact will that have on the m&a market you know there may be some fund managers particularly
In you know UK fund managers looking to exit some of their funds pre any general election which might actually be positive for um the m&a market in the short term in terms of um you know actual m&a activity going going on there I think you know we’ll have to wait and
See you know what that means for the long term um there’s always talk about uh capital gains tax rate increases um and whether the sort of what was called entrepreneurs relief the million pound limit will be um reduced um I mean I think it’s already come down
From from 10 million so uh it’s not a particularly generous tax relief anymore and certainly um you know K starm again has acknowledged that the need for entrepreneurs and business investors to to have certain tax relief e so so I think you know we we’ll you know it’s Crystal Ball gazing isn’t it
We we’ll we’ll wait and see and of course you know as as ree alluded we’ve got the Autumn statement on Wednesday in terms of sort of a a potentially weakened m&a environment um you know undoubtedly there’s still investor pools out there in the sort of private Equity
Market um but you know for those um businesses that for whatever reason they might not think private Equity is right for them we are seeing still in uh the employee ownership trust so eots are a popular alternative um and you know for for those that aren’t F familiar um with
With eots it can effectively allow uh business owners to exit um with a a n perent tax rate so so obviously the tax is very attractive it’s a very friendly sale because you’re effectively selling to your employees on deferred terms um and you know generally we’re seeing
That’s a much um more um friendly way I guess rather you know and a way to create a sort of market for the sale of your business in in a weakened environment um more and more we’re seeing those backed by Banks and and and um you know so that money can be paid
Out more initially um but that is definitely um certainly in this sector where it’s a people people L business um we’re seeing that’s a popular alternative thanks well and actually Paul somebody did ask a question earlier as to whether eot transactions were included in your deal summary I I don’t
Think they are are they no no they’re not included no no yeah sure so we have got three minutes left so I think we’ll have a quick sort of ram Robin what are your views on the outlet for the years ahead and what should people who are considering selling be doing or thinking
About so David over to you first yeah I just just very quickly I’m I’m an optimist I think you know and and you know with the backing of LDC we will continue to look to invest in in in media assets if I was going to give advice you know first and foremost you
Know it’s performance to the business you know focus on delivering high quality service to your clients you know and driving what growth you can in in in a difficult Market will always serve well but when it comes to you know prepping for for a for for a potential transaction don’t underestimate then you
Know need to you know have your ducks in a row have good financial information and data within within the business because whether it’s a you know trade or private Equity buyer you know having good quality information that tells the story of your growth within you know the
Context of of of your of your market and gives an investor or buyer confidence in the Outlook over over the medium term is is always money well spent Co oh you’re on mute oh sorry um yeah very similar note to David get your house in order get sale ready um incentivize your management
Team work on your value proposition get your data sorted um great businesses will be acquired regardless of the macro backdrop and um in the medium term with with bullish about the m&a market not a short list of things to do then and I think kevat that we start thinking about
That way way before you’re planning on selling where Don’t Leave It All To the last minute and Mel I think Paul’s probably stolen some of the things I was going to say but but um e echoing what you’ve just mentioned Esther think about incentivizing your management team
Because any buyer will always want to make sure that they are incentivized and make sure it’s done as tax efficiently as as as possible so you know we quite often see people come to to us two two three four months before wanting to go to market and it’s much better trying to
Actually sit back and get a plan together now as to um what the future looks like for management absolutely and then finally we’ll end with a bit of crystal ball gazing so ree where do you think interest rates are going to settle well our guess would be somewhere
Around about three to 4% you know we think is a sort of you know a sort of a uh a reasonable estimate what the equilibrium rate would be so not as low as we saw them um in the preco era um not as high as current layer Falls but
Um you know somewhat uh somewhat in between and um you know I would have uh I I would have thought the people need to get used to interest rates about at those levels that’s still a low level uh compared with you know much of uh post
Second war UK history um you know but obviously it’s not as low as um you know what we’ve on Aid we’ve seen over the last decade or so thank you very much well we are at that witching hour like I say it’s been recorded so please do share please do
Fill out the survey um it helps us to shape future seminars um a very quick plug we have got a um a seminar a real life inperson seminar at Basta coming up on Wednesday the 29th of November it’s in the evening sort of 5:30 jobby where Paul will be presenting the results of
Our Mar Services um kpi um survey that we perform every year and have done for the the last 30 odd years and that will be followed by a really interesting panel discussion with Camila from Elvis um Sarah from the and partners and Natalie from uncommon so please do um
Look out for emails and and posts on LinkedIn about attending that because the more the merrier so thank you all very much for joining us and thank you very much to our panelists it’s been incredibly insightful and jam-packed hour and I hope everyone has found it really useful I have certainly found it
Useful myself