We spoke with Jean-Philippe Verdier about the upcoming recession. Jean-Phillipe is passionate about advising clients on investment banking transactions. In a nutshell, acquisitions, disposals, mergers, IPO advisory or fundraising. In 2016, with 15+ years of experience in the City with Paribas, Deutsche Bank, Greenhill and Jefferies, and some £25bn+ of M&A deals under his belt, he went the entrepreneurial route and founded Verdier & Co. Corporate Advisory.

After 6 years of existence, with 10 employees, Verdier & Co. is focused on Tech, Healthcare and GreenTech/ClimateTech and advises international corporates like Fujitsu and Apleona on M&A transactions and retained corporate finance topics.

There is a recession looming around the corner which will make the dealmaking in M&A slow down and according to some people even completely stop. How do you think the recession will affect the global M&A deal sector and specifically, Europe’s?

The likelihood of a recession is increasing by the day. It is no mystery that the tightening monetary policies – ending a decade-long of quantitative easing concomitantly with interest rate hikes to tame inflationary pressures – that combined with heightened geopolitical risks are dampening capital markets (most equity indices are down 20-30%; ECM activity is on hold with a 90% fall 1H 2022 vs 2021; DCM activity down 50%). Not surprisingly we are seeing slower M&A activity also in 1H 2022, though that is off record levels of 2021, and 2H 2022 is likely to be even slower (in value term).

Corrections to valuations will bring new opportunities for transactions (e.g. public-to-private). Still, the current economic threats (inflation/ rising energy costs/ supply chain constraints, war on talent…) are not yet fully priced. Downside risk protection is back on the agenda. We are seeing a change in the approach to due diligence, with greater stress testing, focus on pricing, relationships with key customers and suppliers, key employees’, remuneration…

Still, M&A will continue to play an important role in our corporate clients’ growth strategies, and that’s the dialogues we are engaged in as we speak. The next 6 months will be critical in shaping the outlook of the Investment Banking industry.

6 months ago, would you have thought (together with other experts) that this slowdown would happen in the deal sector? 

We all realised that the level of activity was unsustainable, markets were rallying, valuations were rocket high, debt leverages were off the roof, so we were wondering how quickly and how sharply the wheels would fall off. What no one could have predicted is the war in Ukraine and the ensuing sanctions and consequential energy/ food/ logistics crisis.

Do you think that private equity will begin to capitalise on solutions for today’s crisis? If so, in what kind of sectors would you expect this.

In the UK, private equity activity remains solid, despite numerous economic and political headwinds. Whilst deal value and volume in the UK have decreased, PE investors amassed significant dry powder from a phenomenal 2 to 4-year cycle of ever bigger fund raises. It is not the first crisis these funds have faced; they are well equipped to weather this new one.

Our discussions with them indicate that there is greater appetite for build-up transactions. In fact, we are experiencing increased demand for our Extensive Mapping Intelligence (EMI), a proprietary acquisition scoping methodology targeted for build-ups. It unearths hard to find targets, and its AI capabilities bring really innovative acquisition ideas, and that feeds into PEs unravelled deal doing capabilities and appetite. 

There is, and will be even greater scrutiny throughout the investment process, particularly for early-stage ventures (e.g. venture capital firms are now demanding early-stage companies to develop business plans). We would also expect financial investors to adjust to more expensive debt/ lower debt availability, meaning certain riskier sectors (e.g. retail, restaurants, consumer facing businesses prone to disruption, high growth cash hungry businesses) will face even greater headwinds.

Your predictions on M&A activity for the last half of 2022? 

M&A is a useful tool to help businesses grow beyond their organic strategies and accelerate the deployment of their strategic agendas. It will remain an important lever for businesses as they continue to navigate the uncertain economic environment.

M&A activity tends to lag behind markets by ~6 months. Sellers’ expectations and business plans need to adjust to the new environment whilst buyers have already developed a more cautionary approach to business prospects and valuations.

Not surprising that deals fall apart. For instance, on the higher end and publicly known, the disposals of Boots (£5bn) or Mead Johnson infant nutrition ($7bn) were shelved. Value, business plan risks, availability of financing (or lack thereof) were all key factors. Competitive auction processes are no longer that competitive. It also starts to slowly permeate the lower end of the market.

We help women get a job in finance, should they worry about the upcoming recession?

Most big banks have started tuning the recruitment tap down. A few have actually started already “creaming off” in the most impacted activities of ECM, DCM and trading, particularly at senior and mid-senior levels. M&A will not be spared.

We cannot neglect the fact that there has been significant disruption in the labour market: there is a war for talent in many industries. In the context of corporate finance, banks are having to work harder to not only attract but also to retain top talent. This will cool off as alternative highly financed – high growth – big money recruiters will be less.

We believe there is a need for a real shift in the way traditional banking works, and this is something that our firm is proud to be founded around, namely collaborative working style, work-life balance, efficiency and not quantity. The current levels of activity and the need for a transformation in the industry will undoubtably open up many opportunities for female talent to succeed.

What have you seen in the past: What was the effect of downturns on hiring in M&A?

M&A is a volatile industry and, consequentially, the recruitment model of these firms, particularly larger institutions, tends to mirror the cycle. Churn and retention are and will continue to be a challenge but the fear of a recession will not stop deal-making activity.