Some of our Deals team got together with a group of industry insiders over lunch to discuss the current M&A Landscape. Our guests, all with backgrounds in Private Equity investment or alternative lending, shared their insights and perspectives based on their current experience. It was a lively and wide-ranging conversation based on personal experiences of the M&A landscape, providing some great insights into the M&A outlook for 2024 and beyond particularly for the UK.
Here’s a flavour of some of the insight provided. Confidences have been respected.
M&A LANDSCAPE AND OUTLOOK
Around the table there was a sense of ‘’green shoots’ of a recovery beginning to emerge. There’s a positive trend in the volume of potential deals (pipeline) and investment opportunities as we move through 2024 which the group felt offered some indication of the early stages of a recovery in M&A activity.
However, challenges and uncertainty remain of concern. Financing M&A deals remains more expensive than it’s been in a decade which continues to weigh heavily on valuations and consequently deal activity.
Deal processes are taking longer with increased uncertainty and related risks. There is increased scrutiny by both buyers and lenders, driven by concerns about economic volatility, specific industry challenges as well as specific risks linked to a specific asset.
TRENDS IN DEAL PROCESSES
Many mentioned they were seeing longer deal processes but at the same time in the mid-market they cited many instances where sellers were not sufficiently prepared to respond to the heightened scrutiny from buyers especially in the mid-market. Clearly in tougher markets, proper preparation by sellers is critical to maximise the chances of a successful sales process.
Dealmakers are increasingly using earn-out structures, where part of the purchase price hinges on future performance as a way to help mitigate risk in a more uncertain economic climate.
EMERGING TRENDS AND RISKS
The impact of AI is a growing area of focus for management and investors alike – providing both opportunities and threats. Most in the group highlighted that a detailed assessment of technology risks including AI was core to their deal process with a general recognition that they needed more skills in this area.
There was broad recognition using AI to analyse vast amounts of data (financial records, contracts, etc.) to identify potential risks and opportunities faster and more comprehensively was an emerging theme- not there yet but expected to be used more widely by investors.
The AI future in the M&A world is uncertain but looks promising. It’s an area everyone present felt they need to stay informed about particularly when it comes to the latest advancements and potential applications of AI in the M&A/PE space.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG)
There was a strong consensus among the group that ESG factors are no longer optional but a key element of any PE investment. Whilst the pressure had initially come from the funds Limited Partners, PE firms have had to build a much deeper understanding of ESG both in terms of risks and opportunities.
ESG risks are under active consideration during the M&A process. Going beyond just identification but to develop strategies to mitigate these risks and potentially unlock hidden value through improved ESG performance including new business opportunities.
There’s been a significant rise in the number of companies, including those represented around the table, choosing to operate as B Corps. Suggesting a growing focus on balancing profit with social and environmental responsibility, potentially impacting future investment targets.
WANT A SEAT AT THE TABLE?
We really enjoyed hosting this event and want to thank all our guests for an excellent roundtable discussion. We’ll be holding more of these roundtables, so get in touch if you’d like to be part of the next event.
