New research has revealed that the UK has overtaken the Netherlands and Germany to become Europe’s most attractive destination for inbound and domestic investment. In the latest rankings from the Mergers and Acquisitions Research Centre (MARC) at Bayes Business School (formerly Cass), the UK rose six places year-on-year to establish itself as the third biggest market globally, behind only the USA in first and Singapore in second.
Despite the huge impacts that Brexit and then COVID-19 have taken on the UK economy, Bayes said the UK had defied expectations to become Europe’s most attractive target for investment. Bayes identified the response to COVID-19, including the furlough scheme and the speed of its vaccination rollout, as key factors in giving the UK the edge over its European rivals in 2021.
However, as inflation rises and market uncertainty grows, Bayes has also warned that a period of intense post-COVID dealmaking is coming to a close, with deal valuations for 2022 so far significantly down on corresponding periods of 2021.
Despite this, the UK’s strong M&A performance during 2021 and the global nature of the issues currently impacting dealmaking in 2022 mean that it should remain among the most attractive markets for inbound and domestic investment, both within Europe and globally.
Furthermore, despite an overall slowdown in M&A activity, several key sectors of the UK economy are continuing to record strong dealmaking figures, with UK industries such as financial services and insurance having established themselves as European leaders.
What does the report show?
Bayes says that its annual report aims to evaluate the capacity of a country to “attract and sustain M&A activity”. The ranking is based on a weighted average composite of 21 key indicators, which are aggregated into six factor groups: Regulatory and Political; Economic and Financial; Technological; Socio-economic; Infrastructure and Assets; Environmental, Social and Governance.
75 per cent of a country’s final score is weighted to the index, while the remaining 25 per cent is weighted to domestic and in-bound cross-border M&A activity that year. This year’s report, based on dealmaking during 2021, involved 148 countries and was the first to reflect the true impact that the COVID-19 pandemic has had on the attractiveness of individual nations to foreign investors.
In the latest report, the UK registered an index score of 76 per cent, up from 70 per cent in 2020. This improvement meant that the UK only fell behind Singapore (74 per cent) and the USA (76 per cent), while overtaking Germany, which fell two places year-on-year after seeing its index score fall from 72 per cent in 2020 to 68 per cent in 2021, and the Netherlands, which fell from fourth to sixth after its score dropped from 71 per cent to 68 per cent.
For each of the top three, the highest factor group ranking was Infrastructure and Assets, with Bayes writing that the USA, Singapore and the UK, along with France (7th place) and Spain (9th place) “all have high levels of good infrastructure such as registered companies, ports, rails and roads”.
For eight of the top 10 countries – UK, Singapore, Canada, Germany, Netherlands, France and Switzerland – the Socio-economic factor group was ranked as the biggest market challenge. This factor group reflects factors such as population size and demographics, COVID-19-related death and recovery rates and unemployment levels.
What is behind the UK’s rise?
The UK’s rise to 3rd place is based on a wide array of factors, including economic changes, the impact of the COVID-19 pandemic and the aftermath of the protracted Brexit process. Bayes Research Fellow Dr Naaguesh Appadu, who compiled the ranking, said: “The UK continues to defy expectations post-Brexit, rising six places globally based on the most recent calculation methodology and becoming the most attractive European target for investment.”
As well as defying gloomy predictions about how the UK market would fare following the completion of Brexit, Bayes also cited the UK’s response to COVID-19 as a key factor in attracting inbound investment, with Dr Appadu commenting: "The UK’s response to COVID, including the furlough scheme which helped businesses survive and the speed in delivering vaccinations, has no doubt contributed to its sustainability as an attractive place for investment.”
With major European economies including Germany, the Netherlands and Switzerland dropping in the rankings, and the likes of France, Italy and Spain remaining stationary, Dr Appadu observed that these nations appear to have seen a more adverse impact on inbound investment following the pandemic.
“Interestingly, members of the European Union have endured mixed fortunes since the start of the pandemic. Despite making steady progress in the rankings, COVID appears to have held back Germany (8th), Spain (13th) and Italy (30th) – all of whom were declared as coronavirus hotspots at different stages of the pandemic.”
While the UK has seemingly responded well to COVID-19 (as well as Brexit), it also seems likely that its position globally has been boosted by the comparatively weaker recoveries seen among some of its major European counterparts.
Speaking to City AM, Dr Appadu also concurred that lower interest rates and better access to capital in the wake of Brexit had been expected to make UK businesses more appealing. However, he warned that this was unlikely to continue amid high inflation and rising interest rates.
What is the outlook going forward?
Dr Appadu’s overall outlook on M&A is that a range of factors will lead to dealmaking declining considerably this year in comparison to the rather frenzied activity of 2021. He commented: “With the geopolitical risk which has given rise to high inflation and a rise in interest rates, we expect the cost of capital to increase. Therefore, I would expect M&A activities to be significantly lower than last year.”
Indeed, bearing out such predictions, recent figures from the Office for National Statistics have shown that the value of foreign acquisitions in the UK during the first quarter of the year was £11.5 billion, down from £16.3 billion recorded in the fourth quarter of 2021.
It is important to note, however, that these UK figures are coming amid a global slowdown in M&A activity, one that was perhaps inevitable given the inflated post-pandemic dealmaking that occurred throughout most of 2021 and the exceptional circumstances that have so far defined 2022 (I.e. the war in Ukraine, global supply chain disruption and soaring inflation).
New data from Refinitiv has shown that July 2022 saw the lowest global M&A deal value in 26 months, with the $201 billion worth of deals for the month down 62 per cent from July 2021. Meanwhile, deal value in the first half of 2022 was down 17 per cent from the record figures seen in H1 2021 to $2.2 trillion
Even in a sector such as technology, which has seen huge M&A activity since the start of the pandemic, the signs of a slowdown are apparent. During April 2022, the UK recorded 52 technology deals, down 20 per cent from the previous month.
However, will lower valuations continue to drive inbound investment?
In a report on the Bayes rankings in City AM, the publication quoted legal experts who asserted that the appeal of UK publicly listed companies to foreign investors had been boosted by UK valuations taking a downturn in the wake of Brexit. City AM quoted a “top M&A lawyer”, who said: “I think it is fair to say that UK stock market valuations are down and therefore that gives greater opportunity for potential buyers”.
This view that increasing market uncertainty and rising inflation could push dealmakers to target UK businesses is shared by other observers. In H1 2022, the London Stock Exchange saw listings fall 45 per cent compared to the same period in 2021 and, in March 2022, the average stock on Nasdaq was trading 40 per cent below its 2021 levels.
While low valuations may be discouraging IPOs, this could see private equity firms increasingly look to acquire UK businesses at low prices. Given the current weakness of the pound, it is likely that overseas buyers may prioritise UK businesses.
Trachet’s CEO of Business Advisory, Claire Trachet, commented: “As a general rule, higher interest rates should decrease M&A volumes because the debt which firms must take up to finance transactions becomes more costly, making it harder to successfully complete a transaction.”
“However, as a result of a flailing IPO market and plummeting valuations, we could actually see an increase in M&A activity as buyers look to capitalise on firms being available at what is essentially a discounted rate.”
So, while inbound investment may be currently declining as a result of the global slowdown in M&A activity, it seems that conditions in the UK and elsewhere will continue to make UK businesses attractive propositions for overseas buyers.
What sectors are continuing to lead the way?
Past the mid-point of 2022, there is widespread acknowledgement that the 2021 dealmaking boom that followed the COVID-19 pandemic is beginning to abate, with M&A activity returning to more normal levels (although still largely above pre-pandemic figures.)
However, that is not to say that dealmaking is down across the board, or that inbound investment into UK companies is poised to significantly dry up. Several key sectors are continuing to record strong M&A figures during 2022, with some even showing signs of growth from 2021.
In the UK’s financial services sector, for example, while deal value declined significantly from H1 2021 to H1 2022, deal volumes increased from 118 deals in H1 2021 to a seven-year high of 136 deals during the first half of this year.
Interestingly, while there was a drop in deal value for non-UK firms acquiring UK financial services business, the number of non-UK firms targeting UK businesses increased slightly from 31 last year to 33 in the first half of this year, indicating that UK firms remain highly attractive targets for overseas buyers.
The insurance sector has also seen strong performance so far this year, with 242 deals completed globally in the first half of 2022, compared to 197 in H1 2021. Cross-border activity was also strong, with 52 deals accounting for 21.5 per cent of the global total.
While much of this was driven by dealmaking activity in the Americas (particular the US), the UK leads the way for insurance M&A in Europe, with 18 deals out of a total of 67 across Europe.
In July 2022, UK-based insurance group Global Risk Partners (GRP) was acquired by listed US firm Brown & Brown, in a deal that enabled the Florida-based broker to establish itself as a major presence in the UK’s retail insurance market.
Founded in 2013, GRP’s rapid growth, led by a string of acquisitions, has seen it generate annual revenues of around £287.7 million, with close to half a million personal and commercial customers and control or influence over £1.8 billion in Gross Written Premiums (GWP).
GRP’s remarkable expansion over the course of less than ten years demonstrates why the company, and the UK insurance market in general, is so attractive to foreign buyers such as Brown & Brown, with the company’s acquisitive portfolio growth establishing it as one of the UK’s top three independent brokers.
Brown & Brown’s CEO Powell Brown said the acquisition was a perfect growth opportunity for the group in the UK and Ireland, commenting: “GRP is a great fit for our business. First and foremost, it has a highly experienced leadership team that shares Brown & Brown’s values of honesty, integrity, innovation, solutions mindset and discipline.”
He added: “GRP’s hub and spoke model has created a highly successful growth engine in less than a decade. In our discussions with Mike Bruce and the team, we have been impressed by the entrepreneurial, owner-driven culture that exists throughout, both at the centre, among the retail broking businesses across the UK and Ireland, and in the MGA and London Market divisions.”
“GRP’s particular focus on retail commercial broking for SMEs is a great market strategy and is consistent with components of our own approach in the US.”
Conclusion
While UK dealmaking is clearly slowing down this year, this appears to be as a result of an accumulation of external factors affecting M&A the world over – rising inflation, soaring interest rates, the war in Ukraine and, perhaps most significantly, a natural deceleration following last year’s inflated activity – rather than a reflection of the attractiveness of UK businesses.
Given the UK’s significant ascent in Bayes’ rankings, as well as the resilient activity seen in several key UK sectors despite current uncertainty, it seems relatively safe to assert that the UK will continue to be an attractive target for overseas investors.
Furthermore, while rising costs may impact deal volumes and values domestically, this may in fact encourage an influx of foreign buyers looking to take advantage of lower valuations in order to acquire businesses in high-growth UK sectors such as technology and healthcare.
Despite the slowdown in M&A, the UK still seems to be outperforming many of its European counterparts in major industries, such as professional and financial services. Meaning that, overall, the UK’s position as Europe’s most attractive destination for inbound investment appears, for now, to be relatively safe.
The company is a well-regarded international retailer and wholesaler specialising in handcrafted and sustainable homeware and fashion products. Product collections offered by the business include home and fashion accessories with an avant-garde aesth...
As a RICS Regulated practice, the company provides chartered surveyor solutions throughout South East England. The business specialises in expert witness services, particularly for housing disrepair and leasehold disputes. The practice is often appro...
An opportunity exists to acquire the business assets of an arts and crafts manufacturer and distributor offering a long established and reputable brand with global presence.
Business Sale Report is your complete solution to finding great acquisition opportunities.
Join today to receive:
All this and much more, including the latest M&A news and exclusive resources
Please choose your settings for this site below. For more information please read our Cookie Policy
These cookies are necessary for our website to function properly and provide you with access to all features.
These are analytics cookies that help us to improve the way our website works.
These are used to improve the functional performance of the website and make it easier for you to use.