Reasons to be cheerful despite the grim figures
The recent insolvency statistics painted a grim picture. Insolvencies in Scotland increased by five per cent in 2023 compared to 2022. Pushed and pulled in competing directions by rising interest rates, energy costs, supply chain pressures and inflation, many otherwise good companies have found themselves struggling. It perhaps came as no surprise as well that the most recent Quarterly Business Index from the Federation of Small Businesses showed a seven per cent dip in confidence among small businesses across the UK in Q4 23.
However, while we can easily be drawn to negative headlines, there are reasons to be cheerful. I think we are beginning to see the tide turn, especially considering the broader view that interest rates have peaked and while there was a small increase in inflation numbers at the start of the year, the direction of travel shows a return to more normal levels. As the biggest debt provider for M&A in Scotland in 2023, a lot of potential deals cross my desk, and they paint a slightly different picture of appetite and ambition.
What business craves is certainty. From a lender’s perspective, deal activity in the Scottish market picked up dramatically in late 2023. If this continues, we’ll see an upturn in M&A activity in the first half of 2024. Nailing down what caused this uptick is tricky, it could be that stabilising interest rates have given businesses the confidence they need to plan and invest.
Deals are also a broad sign of the health of SMES in Scotland, they’re a direct measure of faith in businesses to grow and succeed. Deals can stem from a desire to invest, or when a management team decides it time to move on. We’re expecting to see more management buyouts (MBOS) and employee ownership trusts (EOTS) in 2024.
Looking ahead, 2024 will not be without its challenges, for example we’ve already seen this year how disorder in the Red Sea has a knockon effect on the price of oil and trading routes. However, it also brings new opportunities. Deal planning for the year is well underway, we’ve seen an uptick in deal conversations in the last month alone.
While a general election this year adds an element of uncertainty, broadly speaking we’re expecting a more stable year. As inflation and interest rates stabilise, and management comes to terms with the new cost of capital and what that means for valuations, businesses are feeling more confident.