Gloom continues for City IPOs following strained Q3 for private equity and VC markets
The UK’s equity markets continue to experience significant strain in 2022 following a gloomy H1 due to a combination of factors including the conflict in Ukraine, high inflation and the recent Bank of England announcement of interest rates reaching 3%. As a result, flotations in the UK have decreased seven-fold from £4 billion in Q3 of 2021 to £565.5m in Q3 of 2022. Throughout the year, the fractured IPO market has shifted the spotlight for investors towards private equity (PE) and quoted M&A activity. However, even PE deals saw a decrease of 34% in Q3 compared to the previous quarter and VC investment also suffered, experiencing only half of the investment volume (£4.6 billion) in the same period, according to KPMG. These decreases mark a significant tidal shift, with early symptoms of the recession becoming more visible across the UK’s financial services sector.
However, CEO and founder of business advisory firm, Trachet, Claire Trachet states that the weakened sterling, combined with renewed optimism surrounding new PM Rishi Sunak’s ability to manage the nation’s finances, could potentially result in both the deals market and investment regaining strength in the UK. Serving as testament to this, UK M&As experienced the strongest quarter for deal volumes so far this year rising by 13.9% to 663 deals completed in Q3, compared with 582 in Q2, according to BDO.
British startups and founders have been facing warnings that access to funding is drying up as potential investors become more risk-averse in light of the escalating cost of living crisis. Although startups are among the businesses struggling with higher costs, the “doom and gloom” mentality being instilled in the minds of founders and business leaders could cause them to become over cautious and be detrimental for overall economic growth. By becoming cost-agile and implementing dual track planning, Trachet explains there are always opportunities for UK startups to continue their scaling plans.
Amidst the current volatile conditions, business advisor and corporate finance expert, Claire Trachet, offers advice for over-reactive start-ups which will enable them to continue scaling:
“Although the popular narrative continues to paint a gloomy picture for founders and business leaders across the nation, there are still opportunities which continue to exist for the UK’s startups. All too often high-profile announcements, such as this mini-budget or Bank of England’s latest rate rise, can result in knee-jerk reactions from business leaders could put long-term plans at risk. The popular belief currently is that the tech sector is on the verge of collapse, investment opportunities are few and far between and terms are terrible, however this is simply not true.
“Founders must remain steady and keep their long-term views – knowing who you are as a company and focusing on the fundamentals are the best ways forward. If you know who you are – any crisis is an opportunity. If you look at the analogy of a boat changing directions every time the flow of the current changes, it will only drift without ever reaching its destination. If you don’t keep your course and have a long-term vision as you encounter resistance –interest rates, inflation spikes, unfavourable financing terms and low valuations – your company will remain stagnant.
“I always stress to my clients the importance of being deal ready before heading into any potential transaction, whether it’s a funding round or a potential M&A. The buyer has shown an interest in your firm at a particular moment in time, but a simple change in external market conditions could lead to them getting cold feet and pulling out. What that means is you need to have done all the necessary preparation before negotiations have started, to ensure the deal gets over the line quickly and smoothly and a failed transaction doesn’t impact the companies valuation.
“This has never been more important than in the current deals market where the environment can dramatically change over the course of just a few weeks. Another really important thing here is to both sign and close the deal at the same time, as this prevents anything putting the deal in jeopardy in between those two things happening.”