Europe’s powerhouse: UK middle market

The state of middle-market and private equity investment in the UK and Europe is on an upward swing, but stabilising, says Gary A. Labranche, Association for Corporate Growth president and chief executive


The UK’s middle market is the most vibrant in Europe. Its mid-size companies are experiencing stronger revenue growth and job creation than their European counterparts. Notably, the UK middle market has overtaken Germany’s highly regarded Mittelstand in terms of revenue, according to PitchBook Data, a US-based private equity and venture capital data provider.

To support the growth of mid-size companies, private equity firms remain active in the country, bolstering business growth. The value of buyouts has increased year over year as private equity firms inject even more capital into the economy. Between 2013 and 2014, the value of UK buyouts rose to €19.9 billion from €17.9 billion, according to a 2015 EY report.

UK mid-size companies remain strong, growing revenue at a rate of 3.9 per cent in 2014, outpacing the nation’s GDP growth rate of 2.8 per cent, according to GE Capital. That growth has in turn positively impacted employment. Mid-size companies grew their workforce 2.5 per cent over the past 12 months, making the UK the European leader for job creation.

It remains to be seen how heightened terrorist concerns and other geopolitical issues will affect the growth trajectory of European middle-market companies and private equity investment activity

Private equity investors in the UK and across Europe have benefitted from middle-market companies in distress, owners approaching retirement and companies in need of operational improvement. These conditions have created attractive opportunities for returns and have resulted in a robust pipeline for deal flow across the continent. Meanwhile, a strong dollar has made such deals attractive to foreign investors, particularly those from the United States.

In addition to growing companies, private equity firms’ investments benefit their limited partner investors. According to the 2014 Preqin Global Private Equity Review, private equity outperforms all other asset classes for private and public pension investments over three, five and ten-year periods. Small and mid-size private equity funds, in particular, often yield stronger returns than their larger counterparts.

The UK has seen particularly strong deal flow relative to the rest of Europe; more than one-third of all European new buyouts have taken place in the UK, according to EY. More than 200 deals were completed in the UK in 2014, up from 193 in 2013, showing a rising, yet steady, rate of private equity activity.

Funding growth

Despite evidence of continued private equity activity, GE Capital’s report, entitled The UK Mid-Market 2015: Delivering on Growth, showed that more than a quarter of firms have felt constrained by access to financing over the past three years, indicating there remains demand for outside investment. High valuations, however, may create a deterrent to private equity investors, as will a shrinking supply of good investment targets, according to PitchBook.

In addition to financing concerns, other factors that may contribute to a coming slowdown include challenges related to recruiting and retaining skilled workers, maintaining updated technology and adjusting to new regulations. Several organisations exist to help support European firms as they face these challenges. The European Capital Markets Union initiative, for one, is working to break down barriers to cross-border investments within the EU. Its goal is to increase the availability of financing for companies in need of growth capital.

It remains to be seen how heightened terrorist concerns and other geopolitical issues will affect the growth trajectory of European middle-market companies and private equity investment activity. For now, the UK middle market remains strong and private equity firms continue to be active across Europe.