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M&A plummets in the wake of economic uncertainty

A marked slowdown in private equity dealmaking so far this year is expected to impact the second half. A buying opportunity may await, but sellers must adjust their valuations expectations first…

Global dealmaking by private equity funds has plummeted in 2022 as banks have pulled back financing in a risk-off environment. 

Across the M&A market globally, activity fell by 23% in value to USD 2.2 trillion in H1 2022, compared with the same period last year, according to Dealogic. By volume, the drop was 20% to 15,764 deals over the same period. 

Sponsor-led activity, which typically involves private equity firms, showed a relatively smaller 13.1% decrease in value compared to H1 last year, buoyed by several large and high-profile buyouts in Q2 such as Blackstone’s $46.4 billion majority acquisition of Atlantia, the $21 billion takeover of Ramsay Health Care by KKR and the $10.3 billion take private of Zendesk by Hellman & Friedman and Permira consortia. 

In Europe, Blackstone and Edizione’s $46.6 billion public offer for Italian transport firm Atlantia was the largest European leveraged buyout on record. 

“M&A is just plummeting,” says a partner at a major UK-based private equity fund. “We’re not yet seeing proper adjustments [to valuation] in seller expectations and volume is quite small, but there’s more pain to come.” 

There are two views here: year-on-year slowdown or cyclical resilience. 

According to EY, global M&A activity has remained remarkably resilient and CEOs continue to have a healthy appetite to pursue transactions. Compared to the average of the last deal cycle prior to the pandemic (2015-2019), H1 2022 activity is up 35% by value and 13% by volume. 

Other trends are also evident in H1 dealmaking data. 

In private equity, there has been a multiyear trend toward bigger funds doing bigger deals. The trend accelerated in 2021, but the real shift came in the market’s broad middle, where the number of $1 billion–plus deals roughly doubled last year – increasing average deal size by 57% and pushing it past the $1 billion threshold for the first time, according to consultant Bain. 

This mega-deal phenomenon seems unlikely to continue to grow through 2022. 

In the US, there were only 17 private equity transactions valued at $1 billion or more in the first three months of 2022, accounting for nearly $80 billion in total value, according to Pitchbook. Over the course of 2021, the total was 124 mega-deals, totaling $377 billion. 

Past the peak 

Speaking to Bloomberg in June, managing director at Carlyle Group Marco De Benedetti, pointed to a “definite slowdown” in private equity deal-making, adding: “I think the peak is behind us.” 

Given that many of the deals recorded in Q1 2022 would have been initiated at the end of 2021, before the Ukraine war, H2 2022 deal volumes may be even more vulnerable to the inflation, recession fears and rising cost of capital of H1. 

The average time to close a deal has also increased in 2022, with 60% of transactions during the first six months taking over 70 days (the long-term average time between announcement and closing), compared to 54% in the first half of 2021, according to WTW’s Quarterly Deal Performance Monitor (QDPM). 

“With the uncertainty that we have, it is our view that we will continue to see [this slowdown] evolve to an even greater velocity into the second half of the year,” says Finn at Intriva Capital. “So far, we are not seeing sellers wanting to realise a lower multiple and exit, we’re just seeing the slowdown in activity caused by deals not being done.” 

For the buyout activity that is continuing, capital structures were more conservative in H1 than at any point in the last 10 years, according to data from the Centre for Private Equity and MBO Research (CMBOR) in July, showing that sponsors and lenders alike clearly cautious against a backdrop of rising interest rates and squeezed earnings. 

UK on top 

For deal structures above £100 million, the average equity portion has risen from 37.3% in 2021 to more than 50% so far this year – meaning larger buyouts have been majority-funded by equity for the first time since 2012. The average debt portion has fallen to 47%, down from 62.7% last year. 

The UK remained Europe’s largest private equity market by both volume and value in H1, according to the CMBOR, with the Netherlands jumping to second in value after 3G Capital’s €6.3 billion buyout of Hunter Douglas and Apax Partners and Warbug Pincus’ €5.1 billion acquisition of T-Mobile Netherlands. 

Elsewhere in Europe, other factors impacted activity in the first half, says Christian Marriott, head of investor relations at CMBOR’s sponsor Equistone. 

“The French presidential and parliamentary elections seem to have prompted a temporary slowdown in larger-cap deal activity. Meanwhile the DACH market is more proximate to the conflict in Ukraine and some sectors are heavily exposed to potential disruption in energy supply, causing both sponsors and businesses to exert more focus on navigating these challenges.” 

For some private equity funds, this may present investment opportunities in H2. 

“Most of our activity is focused on North America but we are also seeing the opportunity set expand in Europe in the face of massive disruptions from the Ukraine conflict,” says Reuben Munger, founder and managing partner of Vision Ridge Partners, which invests across real assets and private equity. 

“We have been focused on how niche opportunities within agriculture can create an enduring market position given the various disruptions and changes taking place in the marketplace. This also translates into core other parts of power infrastructure – as market volatility and cost concerns are causing disruptions, they are also creating significant opportunity.” 

Indeed, in a forecast survey published in July by research firm Third Bridge, almost two-thirds (61%) of respondents representing firms with funds worth more than €500 million plan to prioritise diversification into new geographic markets in the next year, with 52% saying they will focus on entering new industries. “Private equity is extremely well-adapted at turning periods of volatility and market dislocation to its advantage,” said co-founder of Third Bridge Joshua Maxey of the findings. 

“If you roll into the back half of the year, and you can at least get some stabilisation,” says Noell at Providence. “I think that’ll lead to much greater levels of activity. And we’re seeing it pick up some in terms of new opportunities kind of coming to market.” 

Buying opportunity? 

Despite – or maybe because of – the correction in the public markets, technology remains the most active sector for M&A and is expected to offer the strongest returns for buyout investors going forward, according to research by Private Equity Wire. 

When asked ‘Which sector do you expect to see the strongest returns for private equity buy-out funds going forward?’, around one in three respondents pointed to technology/IT, with healthcare a close second. 

According to EY, deals focused on technology targets are now at double the level of the previous cycle, up 95% against the 2015-19 average. 

In recessionary times, the IT sector tends to suffer most in public markets, followed by communication services and industrials, according to Schroders in June. In a fundraising round in July by private equity-backed fintech Klarna, its valuation was reduced to the lowest level since August 2019. 

“We need to be careful around the correction in multiples in some sectors where multiples were not really correlated with cash flows,” says Personnaz at Ardian. 

In contrast, downturns tend to be a good time to invest in more defensive plays such as consumer staples and healthcare companies, as well as in bolt-on M&A for existing portfolio companies. 

“I don’t think valuations are going to go shooting back up, but at least right now, I don’t see another big leg down in terms of valuations,” says Noell at Providence. 

“When you hit volatile waters,” notes Finn, “the ones that start screaming for help at the beginning, were perhaps not so sound going into difficult times. And the more time goes on, you see that opportunity set starts to evolve.” 

Whether 2022 represents a buying opportunity for private equity also depends on the amount of dry powder within a fund strategy. 

In July, it was reported by the Wall Street Journal that technology-focused Francisco Partners accelerated the fundraising of almost $17 billion in advance of a possible market correction. Founding partner and chief executive DJ Deb said he expects plenty of attractive investment opportunities to emerge in the coming years, although they could materialise in the public markets a bit sooner than in the private markets.

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