PE Tech Report


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AI piques private equity interest

More than half of large PE firms are looking to acquire an artificial intelligence (AI) business, according to the second annual Global M&A Trends and Risks Report from global law firm Norton Rose Fulbright and M&A intelligence specialist MergerMarket.

Some 54% of the leaders and top-level executives, including Chief Operating Officers, Managing Partners, and Chief Investment Officers at large private equity firms surveyed for the report said they are targeting either a “pure” AI business or a company that creates AI-infused products.

“Pure AI businesses are more of a venture capital or growth equity play at the moment – they’ve certainly seen some high-profile fundraisings over the last 12 months,” says Sean Murphy, Global Head of FinTech at Norton Rose Fulbright. “In contrast, there are software businesses that have an AI component to their product offering. These AI-infused technology businesses are likely to be of interest to PE firms and strategic acquirers.”

AI has also made inroads in the dealmaking process itself, with a significant share already using or planning to use it in their internal documentation (74%) and for M&A due diligence (63%).

As dealmaking optimism grows broadly, with more than half (59%) of global dealmakers surveyed expecting their appetites for M&A to grow in 2024, the technology sector overall is expected to see the highest growth in cross-border M&A activity in 2024. Some 71% of respondents identified it among their top sectors thanks to pent-up supply and demand.

At the macro level, approximately half (47%) of dealmakers around the world are expecting M&A activity generally to increase compared to 2023, with the largest jump forecast in South and Southeast Asia. Just over two-thirds of respondents (68%) believe M&A activity in that area will grow in 2024 – the largest share across all regions – thanks to competitive valuations, regulatory environments that are less onerous and improved access to financing.

Dealmakers are largely divided on the financing landscape in 2024, with 38% expecting access to financing to improve, 31% believing it will stay the same and 31% predicting conditions will worsen.

However, outlooks vary substantially among regions. Respondents see Europe as the most challenging environment for deal financing, while the US along with South and Southeast Asia appear to have significantly better financing options.

Broadly, dealmakers are casting a wider net for financing in 2024, as traditional funding conduits face increased pressure around liquidity and higher interest rates. Cash reserves are an overwhelmingly popular option, with 90% expecting it to be a commonly used form of financing, particularly in the US.

Similarly, 91% of survey respondents expect private credit to be the most commonly used form of financing in 2024, thanks in large part to its relative speed and ease of access. While traditional bank loans, equity capital and high-yield bonds are still important, nearly one-third (31%) of the executives surveyed say private debt will be the most important financing source for the year ahead, up from 14% in 2023.

In terms of headwinds, the regulatory environment presents a key challenge to M&A activity in the year ahead. While ESG guidelines rank among the most important deal drivers, one-quarter of respondents (25%) include ESG-related regulation among the top two factors most likely to suppress deal activity in 2024. The vast majority of respondents (73%) also expect ESG scrutiny around the world to increase compared to last year, compounding the importance of ESG data.

Antitrust is also expected to have a pronounced suppressive effect, particularly in the US, EU and East Asia. One-third of dealmakers across regions say that antitrust will be among the top types of regulation and policy impacting M&A activity – more than any other category.

Outside of regulations, other impediments to deal activity include the increased cost of financing, commodity price risks, geopolitical uncertainty (particularly in the Middle East), transparency issues, ESG concerns broadly and issues overcoming valuation gaps.

The report drew on the views of 200 leaders and top-level executives at multinational corporations, large private equity firms and major investment banks around the world.

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