UK & European highlights

A clear slow-down, with uncertainty ahead

The first half of 2022 saw a slow-down in M&A activity – an approximate 30%[1] decline in the UK compared to H1 2021. Though deal activity in the UK has, for the most part, withstood the macroeconomic and geopolitical turbulence imposed by the Russia / Ukraine conflict and post Covid-19 recovery, sponsors have become increasingly cautious in assessing prospective investments, suggesting a climate that will likely be harder for buyers to get the conviction needed for deal completion.

Processes undertaken prior to Ukraine / Russia conflict, have closed

Much of the deal activity in H1 2022 was driven by auction processes that had launched prior to the onset of high inflation and the Russia / Ukraine conflict – most of which have now completed, suggesting a period of uncertainty ahead.

As investors are faced with greater inflationary, supply chain disruption and interest rate pressures than the beginning of the year, sponsors will likely find it increasingly difficult to price the risk of new investments and are likely to only deploy capital into opportunities that operate robust and highly resilient business models. Again, suggesting a slow-down is approaching.

European debt markets followed suit…

The European debt markets reflect the uncertainty of investors, where notably we saw the:

  • The high yield bond market generated its lowest first-half issuance since the global financial crisis[2]
  • The macroeconomic catalysts already outlined triggering a 10-week closure of the primary market from February 2022, followed by significant discounts for subsequent bond issuances
  • H1 2022 leveraged loan volume dropped by 66% to EUR 28.1BN from EUR 82.8BN during H1 2021[3]
  • Terms have also tightened during the period - even for borrowers in popular defensive sectors

Given all of the above, the path to recovery remains unclear and will likely depend largely on central banks’ response to rising inflation. In our opinion, however, it is unlikely that we will see a rebound in issuance for the remainder of the year.

The definition of ‘quality asset’ is changing…

However, the definition of ‘quality’ has augmented in the current environment. Where high quality businesses in the time immediately post-Covid took the form of high-growth, tech-enabled assets, now these are characterised by extraordinary resilience. We are beginning to see a shift in investor preferences to businesses in more stable sectors underpinned by long-term contracts such as Infrastructure services, high recurring revenue such as Software, and more modest long-term growth prospects.

This shift has meant valuations across the high-growth, tech-enabled sectors are softening, with highly resilient businesses defined in this ‘new way’ being competed for more fiercely by UK and European investors. Businesses initially set to come to market in the latter half of 2022 that do not pass this heightened resilience threshold will likely opt to delay their exit, until the market becomes more stable.

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Regional activity snapshot 

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022


Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022


Source: Q2 2022 European mid-market deal data, Mergermarket, 01 September 2022

H2 2022 outlook

Over the coming months we expect to see four key trends develop:

1.The rise of the off-market deal, in tightly controlled processes

In an environment where the macroeconomic outlook is inherently uncertain, long and drawn-out sale processes are at greater risk of falling over as the window of opportunity for business trading and market conditions to deteriorate is greater. Because of this, we expect private equity sponsors to engage in curated, off-market processes, in which prices are locked in early and deals are transacted quickly, with greater frequency. These processes will likely be best suited for buyers that have tracked target businesses for long periods of time and have done considerable work upfront.

For the same reasons, we also expect to see more minority transactions over the coming months as founders and sponsor-owners alike look to de-risk their investments.

2. Mid-market allocations to decline

We are already seeing a change in sentiment from LPs for mid-market fundraising allocations. In recent years, LPs have made significant money multiples and absolute returns in the large-cap private equity market. Subsequently, we are increasingly seeing capital being allocated away from mid-market funds leading to smaller and less established mid-market GPs finding the current fundraising environment tough.

In order for these mid-market GPs to rise above market noise in the coming months, they will likely need to show consistent performance track records or differentiated value-add strategies to prospective LP suitors. And, as valuations for the ‘certain’ tech-enabled businesses ease off, LPs are committing capital to funds that offer a balanced sector investment strategy. Additionally, falling valuations across alternative asset classes has further squeezed LP allocations from the private equity segment.

3.Capital raising continues, however…

The number of global private equity firms currently raising new funds are at a near record level[4], however GPs’ ability to raise capital is being constrained by LPs with limited bandwidth to engage and diligence such a large number of funds. With so many sponsors looking to raise capital and finite LP capacity to invest, many GPs are finding that LP private equity allocations for 2022 have already been spent, and LPs are advising them to come back in the new year for the 2023 allocations.

4.Continuation fund deals on the rise

Continuation funds have been on the rise with the GP-led secondaries market now estimated to have a value of USD 60BN per annum[5]. DC Advisory’s new GP Secondaries Managing Director, Michael Wieczorek, provides an update on H1 continuation fund activity and an outlook for 2022 as it stands.

H1 2022 GP-led deal flow has remained robust, with market estimates of executed deal volume between EUR 20-28BN[6], with a thirst for liquidity from both sponsors and investors, driving secondary market volumes. The drivers for this trend to continue into H2 2022 are:

Traditional exit environment is challenging - Volatile public market valuations, inflation and interest rate hikes – alongside a fear of slowing economies - have made traditional private equity exits more challenging for sponsors. Fund distributions are therefore likely to materially slow from recent elevated levels. Investors considering the macro dislocations and their current exposures are more actively seeking to rebalance their alternative programmes, adding another driver from liquidity

Rationing available capital - With lower inflows to recycle into new commitments, limited partners are rationing their available capital across the congested primary fundraising market. Private equity distributions have generally lagged commitments, resulting in a falling distribution rate and negative cashflows for LPs in four out of the last five years[7] Consequently, limited partners are more actively utilising GP-led secondary processes for liquidity, with market estimates suggesting 70-90% of investors electing to sell their commitments in continuation fund transactions in H1 2022[8]

A higher bar for deals - On the buyside, record secondary deployment levels in the last two years have resulted in less pressure to deploy and ultimately a higher bar for deals. Established profitable businesses which have proven resilience through previous downturns are thus expected to be in continued demand with investment committees prioritizing more balanced transactions. Fundraising activity across the secondary market remains very active with ambitions to reload the dry powder required to support the continued expected growth in deal volumes in the coming quarters

Market remains well capitalised with several secondary funds currently in the market

Source: Greenhill - Secondary Market Review

Benefit of doubling down on an existing winner - Ultimately secondary investors can take advantage of their closer alignment with sponsors, the sponsor’s intimate knowledge and experience in value creation at the asset(s), and the GP’s ongoing partnership with the management team. During market dislocations, this can help narrow the bid-ask spread compared to traditional private equity exit routes and offer a longer runway to capture future upside plus the added access to follow-on capital

Single asset deals - Single asset deals will likely continue to be prominent, as investors should have greater comfort underwriting a focused opportunity where they can conduct robust bottom-up analysis than in diverse portfolios which can be more influenced by macro factors

Preferred equity solutions - Ongoing turbulent market conditions are likely to drive an increase in demand for preferred equity solutions as investors seek to protect their downside risk. These structures can provide equity upside optionality for investors in addition to the hurdle returns backed by preferential rights to cash flows. Preferred equity structures benefit from increased flexibility and by generally providing liquidity at higher LTVs with no security compared to traditional NAV lending facilities, albeit at a higher cost of capital

Competitive fundraising drives tender offer activity - Finally, the competitive fundraising environment on the direct side will likely drive an increase in tender offer activity to supplement ongoing fundraising processes. Sponsors can utilize these transactions to provide liquidity to existing LPs seeking capital to recycle into re-upping commitments and to expand the LP base with the potential to staple new primary capital in the current fundraising


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