The Bank of England should reassess its macroeconomic strategy to better support the UK’s dealmaking landscape, after industry confidence in the economic outlook dropped sharply, says business advisory Trachet.
In December, the Institute of Directors’ Economic Confidence Index dropped down to -28 from -21 the previous month, marking its lowest level since August, as recessionary fears continue to grow.
Claire Trachet, CEO and founder of Trachet, called upon the Bank of England to do more to support a struggling dealmaking environment.
Trachet said: “The current economic climate is presenting major challenges for companies with limited cash reserves. Despite the Bank of England announcing an interest rate hold, when you combine the current rates with an IPO market that shows slow signs of revival, scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding.
“This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and I expect this to result in a growing number of down rounds in the coming year.”
According to Morningstar, 397 UK funds were launched in 2023, down a quarter from the year before and the lowest since 2003 when markets were still reeling from the dotcom crash.
Trachet said the “uniquely favourable” conditions of the past decade are unlikely to return. Over the last two years, however, there has been a steady increase in inflation, requiring a prudent increase in interest rates. Against this backdrop, Trachet urged investors and businesses to adapt to the current market conditions by focusing on value creation and profitability over headcount growth and valuations.
But while deal volume decreased significantly in the first half of 2023 compared to 2022, the UK still remains the most appealing destination for European investment, Trachet said.
“While it may not be the most vibrant global market right now, current conditions in the UK mean that overseas buyers in particular may seize the opportunity to acquire exceptional businesses at discounted prices, sparking a wave of M&A activity in early 2024,” she added.
