A study we undertook using Bank of England data shows UK corporates have seen their aggregate net cash holdings rise over 500%, from £20bn to £109bn, since March 2020 and the start of the Covid pandemic.

Total UK corporations net cash holdings (cash minus debt – excludes financial services businesses)

Source: Bank of England, excludes banks and other financial institutions. Cash net holdings are cash held minus debt.

The build up in cash balances has been so dramatic that UK corporates could consider competing more actively with Private Equity funds in targeting undervalued UK businesses.

While Private Equity firms are actively looking to acquire attractive British companies, privately owned and listed UK corporates have been much more cautious over acquisitions during the pandemic, with their core focus being on their existing businesses.

There is strong appetite amongst lenders to help corporates looking to acquire UK businesses. By using a mix of balance sheet cash and debt funding, corporates can appropriately leverage a deal in order to compete with a Private Equity bidder.

Are we entering a period of corporate consolidation?

Merger and acquisition (M&A) activity is at an all time high as private equity firms have had their busiest 6 months since records began over four decades ago.

There have been 366 bids for UK companies from buyout groups this year, the most for a comparable period since records began in the 1980s (Refinitiv). Private Equity firms are looking to benefit from UK companies’ lower valuations resulting from the combined impacts of Brexit and Covid.

This comes as private investment groups have agreed a £9.5bn takeover of Morrisons – in what could be the country’s largest UK private equity buyout since KKR bought Boots in 2007.

We are in a period of intense M&A activity and corporates will be wondering if it is right to leave so many of these deals to the Private Equity funds

Corporates could be making more use of the cash they are holding, as investing their own cash alongside debt increases the alignment between companies and their funding partners and thus the number of debt options available.

A bid from a corporate can be more suitable for certain businesses and more attractive to vendors, if they can obtain funding that allows them to compete with Private Equity on valuations.

Some owners may prefer to sell to other corporates, given the perception that they may offer more continuity and less organisational restructuring than other options.

This rise in corporate cash may provide opportunities for management teams considering a management buyout or moving to an employee ownership model to progress a deal. The reserve of corporate cash can be used alongside funding from lenders to pay out existing owners and facilitate the sale.

Lenders are busy at the moment given the heightened activity in the M&A market, but they are keen to diversify by funding non-PE owned corporates.

These figures suggest this is an ideal time for businesses to start exploring acquisition strategies. However, they will need to ensure they receive appropriate advice on their funding options, guidance as to which lenders are most suitable for specific opportunities, and how best to approach those lenders with high quality information. The right advisor will ensure that a borrower gets the best debt solution from a supportive lender in a timely manner.

ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.

Want to learn more? Please get in touch at theteam@altenburgadvisory.com.