‘Indigestion’ warning, busy TMT and dry powder to trump rates

With the end of the first quarter of 2023 approaching, PE Hub Europe spoke to leading figures in investment banking, law, accountancy and consulting about the outlook for dealmaking.

Many have tipped the second half of the year to see a surge in activity, as capital markets settle and valuation gaps close – although that could throw up problems of its own.

When the market starts to re-open, “there is a risk that those who are ready that don’t want due diligence to go out of date, those planning a deal at that time anyway, and those that want to accelerate will all come at once”, said Allan Bertie, head of European investment banking at Raymond James in London. “That would lead to indigestion in the market. Some will do a pre-process without formally putting deals on the market to reduce this impact.”

That view was backed by Sabina Comis, global managing partner-elect at law firm Dechert, during a breakfast roundtable in London in early March.

“That’s why we’ve seen pre-emptive deals, trying to get in there before the auction process,” she said. “People will jump on the same deals.”

Her colleague Christopher Field, co-head of Dechert’s global private equity practice, added that the market might bifurcate, with very strong activity in highly sought-after assets, while others struggle to gain attention.

Dynamic shift

There are signs that that deals are being readied, albeit not at the breakneck pace of the last two years.

“We’ve been phenomenally busy,” said Lee Castledine, a partner in the transaction services team at accountancy firm RSM in London. “Everybody across the market was so busy doing deals in 2021/22, but it’s probably back to a more normal sustainable situation currently. The market for due diligence was crazy, with clients in a situation that they were having to pre-book slots weeks in advance to ensure they had resource when deals became live. That dynamic has changed and we are able to operate collectively in a much more rational way.”

But despite potential headwinds, “there is so much dry powder in private equity and private debt” that the market will be busy.

The rescue of Swiss banking giant Credit Suisse by compatriot UBS in mid-March added to those headwinds, added Castledine, although the rapid takeover with “business as usual” messaging from government and regulators prevented the potential for a shock in the market.

It is too early to say if the broader turmoil of this and the collapse of Silicon Valley Bank will have a tangible impact on mid-market M&A, according to Castledine. “Global businesses are ultimately constrained by GDP, but in the mid-market we can often see businesses growing their market share in double digit rates, benefiting from being more agile or from being in a particular growing market niche.”

Much of that activity is in the technology, media and telecoms sector, which has topped the European dealmaking charts in the last couple of years, according to data compiled by RSM.

“TMT is a great example of this and is generally attractive from an M&A perspective because of the visibility of revenue streams and often with favourable payment profiles,” said Castledine.

Steady ahead

While those across the dealmaking landscape are eager for activity to pick-up, not all are looking for a return to the recent years of hectic acquisitions.

Graham Elton, chairman of Bain & Company’s EMEA private equity business, seconded the view that the amount of dry powder in the market means that deals will come.

Private equity can cope with higher interest rates and lower growth, it just means prices will be lower. That will be fine, with so much money to be invested – ending 2022 with a record $3.7 trillion in dry powder, according to the company’s Private Equity Outlook in 2023 report. “Water finds a way to get downhill,” Elton pointed out.

But he hoped that a steady market prevails, rather than one of boom and bust. “How do you price in an environment like that?”