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HOW WILL DEALS BE PRICED POST-COVID?

Jun 25, 2020

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With lockdown loosening, we’re expecting the volume of deals in the M&A market to start picking up. You can read all about our thoughts on the types of deals and the sectors they’ll be in here, but in this article, we want to focus on how we think those deals will be priced.

Lessons from 2008

After the global financial crisis, the market had a massive dip worldwide. Mega deals and international deals slowed down drastically, and the overall value of the transactions dropped significantly between 2009 and 2013, with far less multi-billion pound deals taking place.

Importantly, however, the mid-market deals involving the businesses backed by entrepreneurs continued to happen – albeit at a slower rate to before the GFC. And actually, the investments that were made in that period, particularly by private equity, proved to be highly successful and deliver really strong returns for the PE houses.

Fast-forward to 2020

We’re in another ‘trigger’ moment. An event that will make a lot of people rethink their businesses. But it’s important to note some of the key differences between now and 2008.

Because this is a health crisis, and not a financial crisis, banks are in a much better place now compared to 2008. High street banks are well capitalised, but they’re focusing on their existing portfolios and government initiatives such as CBILS, CLBILS and Bounce Back, so we’re expecting new debt opportunities for non-existing clients to be limited.

We’re also expecting leverage multiples to reduce in the short term, and pricing to increase. In 2008, the leverage levels were extremely high. Pricing for the last couple of years has been frothy, but it hasn’t been built on excessive leverage.

PE houses are keen to invest, but PE needs leverage in the deal structure to make their returns work, so availability and pricing of debt is likely to impact valuations in the short term. However, we’re hearing from the market that a number of PE houses will consider underwriting the debt and refinancing to get deals done.

The post-GFC period showed us that good, strong businesses, with a resilient business model and a great management team, are still going to be in high demand.

Short term, there is a risk of deploying both equity and debt capital, but longer term, given the position of the banks, we’re expecting leverage to bounce back.

There will still be opportunities coming out of this, and it will be those businesses that are already thinking about what the future looks like and how they’re going to seize those opportunities when they come around that will prosper the most.

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