- A Continued Pivotal role for Private Equity; Growing Influence of Private Credit. Private equity is expected to continue to be a driver in the UK M&A market, building on the approximate 12,000 deals undertaken in 2024. While there is still “dry powder” of uninvested funds looking for an investment, there is also a growing amount of unrealised value looking for an exit – be that M&A or an IPO.
The private credit market, ranging from funds to sovereign wealth funds to family offices, is often able to offer looser covenant packages, quicker execution timelines and higher leverage limits – terms that are appealing to the fast-paced nature of private equity. Firms are often willing to pay more for this service and work with lenders who offer bespoke loans tailored to their business, providing opportunities for co-investment (decreasing their own risk) and longer investment horizons.
The increased competition is also forcing traditional lenders to adapt, with the difference in covenant packages and pricing beginning to converge. Joint ventures between the different types of lenders are also being explored, with private credit lenders able to access a deeper pool of borrowers and service offerings that a bank can attract, and traditional lenders able to access a range of higher returning investments and new types of deals.
The relationship between private equity and private credit is expected to further enhance deal flow over the coming year whilst traditional lenders continue to adapt to this competitive landscape. - Greater Emphasis on Collaboration, and Co-ownership and Alternative Acquisition Structures. There is a trend towards strategic partnerships and collaborations, including joint ventures and non-traditional deal structures, as companies seek to navigate changes in the business landscape, including the critical transitions to digital technology and clean energy facing almost all industries.
Strategic players are increasingly looking to combine assets and know-how, alongside sharing risk and expenditure to address new opportunities or challenges in their industries.
Companies are also continuing to utilise non-traditional deal structures which seek to bridge valuation gaps through minority acquisitions coupled with put and/or call options and other phased acquisition structures. A strategic put option investment allows a buyer to sell their stake back to the target or the sellers if milestones are not reached, providing an exit if the investment has limited upside, while call options allow a buyer to take greater control (with payment based on actual results) if the investment proves successful.
As the global economic and political climate continues to fluctuate, we expect joint ventures and non-traditional deal structures to continue to be a valuable tool for companies looking to bridge valuation gaps, minimise geopolitical uncertainty, all while maximising competitiveness and innovation. - AI’s Ongoing Impact as a Deal Driver and on Deal Delivery. Companies continue to adopt and acquire AI capabilities at pace, both as part of their own product offering and as part of their business functions to propel long-term goals such as market expansion, cost efficiencies and greater flexibility. Using M&A to do this (by acquiring an early-stage company, IP, R&D expertise and/or products) can be a relatively quick and cost-effective way to pivot traditional product offerings, as opposed to building capability in house.
Increased competition within the sector will continue to drive innovation and consolidation, with U.S. developers coming under fierce pressure from cost-efficient Chinese startups such as DeepSeek.
However, M&A is not without risk, with increased regulation of the sector. Regulators are expanding their scrutiny of the development of certain AI models and questioning the sources of data used in their development to prevent an influx of data privacy and security breaches. A prime example of this regulation is the New European AI Act which entered into force on 1 August 2024 and is set to be phased in, with the first set of regulations applying from February 2025. This first phase takes aim at regulating “unacceptable risk” AI systems that, among other things, perform social scoring, infer emotions in workplaces, or generally exploit vulnerabilities. Whilst the regulation is aimed at responsible innovation, others argue it could stifle it. In the UK, the government is set to release formal regulations, but has emphasised its intention to foster responsible innovation in and around the AI sector. Given the increased regulation, acquirers must be aware of the compliance risks and issues AI poses with more focus on how a target uses and/or sells AI models.
AI will also become increasingly utilised in deal making in the M&A space – expanding from what are now relatively standard due diligence tools to more complex valuation, integration, and business plan modelling. - Ongoing Regulatory Shifts and Inconsistent Approach Across Borders. The regulatory landscape worldwide is shifting and uncertain. In the United States there is a rollback of regulation on ESG-related matters, coupled with the use of tariffs and ongoing uncertainty as to how foreign direct investment (FDI) rules restricting overseas players will be implemented. In the EU, there seems to be no let-up in the increasing regulation of industry, from AI regulation and ESG reporting requirements to expanding FDI rules.
Conversely, in the UK, regulators are coming under increased pressure to support the government’s growth agenda and to start focusing on not only risk but also growth. The recent replacement of the CMA’s chair may indicate that the regulator will be less risk averse in its approach.
2024 saw the first judgement under the National Security and Investment (NSI) Act. The High Court upheld the government’s decision to require LetterOne, some of whose ultimate beneficial owners (UBOs) were sanctioned Russian individuals, to divest the entire shareholding of Upp following its acquisition. The Secretary of State for Business Energy and Industrial Strategy was concerned about the UBO’s vulnerability to Russian government leverage, leading to national security risks as Upp’s business was installing fibre optic broadband. The NSI Act may well come under scrutiny from the current government in an attempt to balance safeguarding national security with minimising the impact on legitimate business activity and growth. - Continued Use of W&I Insurance and a Maturing W&I Market. The first half of 2024 saw a strong start for warranty and indemnity (W&I) insurance usage, with an estimated 1,500 policies issued. The insurance market has adapted to complex deals, with companies having diverse supply chains, nuanced operations, and tailored technology. W&I often bridges the risk gap, with buyers and sellers being able to transfer a large portion of the risk to a third party where the deal is particularly complex, improving deal certainty and reducing risk.
Adoption in the private equity sector has increased, with W&I providers offering comfort on quick completions with limited due diligence occurring (for example, lengthy, expensive underwriting calls are largely a thing of the past in UK deals). Competition in the market for deals has also meant buyers who offer W&I could make their bids more competitive.
We expect W&I usage will continue to increase, with providers offering more and more tailored and sophisticated solutions, including synthetic warranty coverage and bespoke policies for identified risks in response to an evolving regulatory landscape and the increasing complexity of doing business.