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.