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Trends You Can Trust – Episode 6 – Market Temperature: by Fraser Dixon, Evolution Capital

As the UK temperature reaches record highs, signs are slowly starting to show that the heat in multiples sellers have seen in the mid-market may be creeping to an end. Deal volumes typically drop in the summer months and have so far remained fairly typical in our sector, with only capital markets showing signs of trading weakness and a real fall, but how the final half of the year pans out could well be an early indicator for trading figures as we enter 2023.

Consolidation in the ICT space remains the driving force, with our ‘Christmas Card’ list of trade buyers carefully acquiring synergistic targets to further their competitive edge. Despite a slight downturn in mid-market activity, Private Equity shows similar confidence with the sale of Beechtree backed BCN Group to ECI Partners, for a reported £125m, making particular headlines in our space.

While there may perhaps be indications of longer term concern when looking at wider mid-market activity, in Evolution Capitals focus area of the lower mid-market, where turnover typically ranges between £5m and £50 million, there is still a healthy amount of buoyancy and certainly enough action to excite buyers and sellers alike.

Despite the macro economy, investors are still carrying dry powder, even with the flurry of transaction activity last year and, before that, in the closing moments of 2020. This means that, while the term “sellers market” is certainly still coming through thick and fast, acquirers are able to be more considered with their targeting of prospective acquisitions.

This factor is driving sellers to assess their options in far greater detail, with your average broker model, where the rate of deal completion is typically only around 1 in 5 at best, no longer offering a remotely attractive proposition for shareholders considering truly taking advantage of the market and moving to an exit.

Instead, the more consultative approach of the advisor is taking focus, allowing shareholders to gain genuine insight into not only the current markets, but also to provide an objective overview of options available to them, be it properly structured organic growth, M&A or indeed an exit. Here the value added through proper preparation and methodical and meticulous structuring of advice really comes into play, with problem solving playing as great a part.

The level of activity of course depends on the sub-sector these businesses operate in. SaaS is continuing to drive high deal volume, though it is important of course not to confuse this with deal values. Cyber Security also is generating interest, especially in those trade acquirers having difficulty in recruiting experienced staff.

Another area which we expect to see increased activity is public cloud, or Platform as a Service. In this area the Node4 acquisition of Microsoft Azure specialist Risual acts as a fine example, demonstrating the drive towards European Public Cloud spend hitting $113bn by the close of 2022.

Likewise, as the UK continues striving towards the PSTN switch-off, infrastructure is a huge part and one in which we expect to see a great deal of consolidation in the coming 18 months. Recent moves in this area include the Connexin purchase of Pure Broadband and also Glide effectively acquiring the 85 acres of mixed-use fibre network in Wembley Park from Quintain, with their purchase of Velocity1.

The temperature in the lower mid-market for ICT services remains consistent, but the importance of having a properly structured strategy, and being fully prepared for any future transaction, remains critical to the success of any deal.

Our advise to shareholders considering their options, is to fully both explore and understand the potential sector specialist advisors to guide them on their journey, and complete their own due diligence into past transactions, quality of advice and the rate of successfully completed deals. The emphasis on due diligence remains the hottest element of any successful transaction, so working with a partner to not only advise you, but also to properly prepare and guide you through the process is the key to unlocking maximum value to exceed your aspirations.

www.evolutioncapital.com

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TechnologyReseller: 2021