Benelux

  • M&A activity in the Benelux region saw over a 50% reduction in activity versus the previous quarter[1] for Q1 2022 – down 35% for the same period in 2021.[2] Although the decrease in deal volume appears high, we believe it marks a return to pre-pandemic M&A activity levels
  • 2021 saw exceptionally high levels of M&A activity in the Benelux due to the pent-up demand in the private equity community, most notably the need to monetise existing holdings and significant levels of dry powder
  • However, Q1 2022 saw varying levels of activity in different sectors. As can be expected, both the Business & Tech-Enabled Services and Technology & Software sectors have remained at consistently activity levels to Q1 2021[3], which we expect to continue due to their resilience to market changes and the flight to quality assets we see emerging at buyers
  • Comparatively, the Consumer, Leisure & Retail (CLR) sector saw the highest decrease in deal volume, returning to similar levels to that of 2020[4] - notably contrasting the volume of CLR deals seen in 2021. Similarly, the Industrials sector suffered a 42% drop in M&A activity when compared to Q1 2021,[5] and a nearly 67% drop when compared to Q4 2021.[6] However, the drop in deal volume for the first quarter of the year is not unusual given Q4 is customarily the most active period, and particularly when compared to such an exceptional year as 2021
  • Looking ahead, in our view, the outlook for the market remains generally strong for 2022 but might well polarise towards certain sectors. Continued macroeconomic trends, such as low interest rates - along with lower return expectations reflecting stacking-up of dry powder and post-pandemic recovery - will likely drive investors towards deal activity. However, looming inflation, rising energy costs as well as supply chain disruptions partly being driven by geopolitical forces, in our opinion, will drive a short term flight to perceived higher quality assets in Technology & Software, Business and Tech-enabled Services, and Healthcare sectors. As we have seen over the last year, an increasing number of private equity firms have opened offices in the Benelux region, and with international capital also being brought into the Benelux market we believe there will be a high volume of M&A activity in region this year

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

CEE

  • In the CEE region, Q1 2022 saw increased fundraising activity by several local financial sponsors[7] on the back of successful exits in recent years, and continued investor interest in Poland’s economy and its potential to catch up to Western European countries. As a result, we expect to see increased acquisition activity of local private equity firms, with substantial dry powder
  • Overall, we have a positive outlook on the Polish M&A market for 2022, driven by acquisitive local private equity firms[8] and continued interest into local renewable energy and infrastructure assets
  • However, Poland is not without market uncertainty due to: geopolitical risk involving Poland’s proximity to Ukraine; the large numbers of Ukrainian refugees Poland has taken in[9]; the depreciation and subsequent appreciation of the Polish Zloty (zł)[10]; and Poland’s current reliance on Russian gas supply. These factors will likely pose key questions for investors in the region and subsequently reduce deal volumes, especially in the Infrastructure sector
  • Poland is also in a rising interest rate environment,[11] and this feeds through to budgetary and business risks. We have not seen this yet in deal pricing or in business distress, but this is a space we will watch closely
  • In comparison to its Western European peers, Poland is relatively well prepared to face an energy crisis compared.[12] Poland aims to fully diversify away from Russian gas by Q1 2023, replacing it with supply from the Baltic Pipe – a natural gas pipeline connecting Poland to Norwegian gas sources - and increased capacity of LNG terminals[13]. We foresee this shift in energy supply will bring about strong investor interest in subsectors such as decarbonisation, as investors look to the future of Poland’s energy sources
  • We expect that increased energy prices will likely increase M&A activity in renewable energy sources, as observed over last few quarters.[14] We believe generous subsidy pools, both from local and EU authorities, will drive investor interest for capex-intensive assets with spade-ready development plans

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

DACH

  • Overall M&A activity in Germany was down 10% in Q1 2022 compared to the same period in 2021,[15] although mid-market dealmaking seems less affected[16]
  • Perceived post-Covid high spirits have been dampened by market uncertainty resulting from geopolitical turmoil and general impact on the wider economy, especially the rising energy prices across most of Europe. We believe this could lead to a slowdown of deal volumes, especially in comparison with 2021, in resource-intensive sectors like Consumer, Leisure & Retail and Industrials
  • Market sentiment and general risk awareness are also being affected by a number of factors, leading to a wait-and-see attitude by some investors, including:
      • First central banks increasing interest base rates,[17] with the European Central Bank expected to follow[18], which may lead to hesitation from investors borrowing money from banks
      • Market valuation levels that are under pressure due to overall market uncertainty and increasing leverage cost, although we still expect premium valuations for top-quality assets
      • A lack of planning clarity affecting energy-intensive businesses, such as those in the Industrials and Consumer, Leisure & Retail sectors, making valuations extremely difficult
  • Deals done by strategic partners, however, are less affected by these trends, as these deals are less vulnerable to uncertainty compared to deals from a pure financial return perspective - although any connection to Russia or Ukraine has come under severe scrutiny
  • However, we believe market activity remains high with a solid pipeline. Deal certainty is coming under pressure and the record deal volumes seen in 2021 are not expected to be matched at any point this year. We believe price expectations for assets coming to market, which were acquired at peak valuations, might suffer from a mismatch with current appetite in the market
  • Sectors we expect to see high levels of deal activity in 2022 are Technology & Software, Media & Telecom, Healthcare, and Business Services, as these seem most resilient to changing market conditions, while the automotive industry is expected to remain difficult due to supply chain issues

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

France

  • Though we have seen the impact of geopolitical turbulence in the French market in Q1, this has had less of an effect than that seen in the pandemic, with private equity firms still looking for opportunities to deploy capital - albeit more vigilantly and therefore likely to slow overall deal volumes
  • Equally, financing and increased inflation[19] will likely take their toll on the M&A market in the short-term, and may add to the slowdown of deal volumes across all sectors
  • Conversely, the mid-market remains very active due to the overwhelming presence of the private debt funds, which are still open for business, though becoming more selective due to the current climate
  • In the long-term, we believe concern from investors over deals will focus on inflation and rising interest rates, and companies are already working on their ability to pass on price increases to their clients. This is likely to become investment criteria for both private equity funds and strategic acquirors, potentially hindering deals for companies who can’t pass on this price increase
  • We believe all eyes will be on the banks in Q2 and their ability to keep on financing their clients’ acquisitions - most large transactions are still moving forward but at a slower pace, with some financing institutions closed for business

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

Italy

  • In Italy, deal volumes slowed in Q1 2022 compared to Q4 2021 (-41.0%) and Q1 2021 (-20.7%)[20], ending the quarter with a total of 23 deals completed[21] - of which the 13 disclosed deal values accounted for an aggregate of €6.8bn[22], showing that though volumes dipped, there were still high valuations taking place
  • Equally, sentiment in the sector is positive as the economic environment stabilises following the pandemic.[23] This positive outlook is driven by rapid recovery of almost all sectors in 2022, fueled by the huge financial resources channeled into the economy - such as Next Generation EU funds – and is likely to continue some, though not all, of the deal momentum seen in 2021
  • According to a recent study, in the first half of 2022, 86% of private equity and venture capital operators are planning new investments,[24] with strong interest in transactions in the mid-market in the Industrials, food and beverage, and Technology & Software sectors
  • However, like the rest of Europe, though current market conditions appear positive for dealmaking, there is the potential for hesitancy with current backdrop causing the cost of raw materials and energy to rise, resulting in an increase in inflation, which could reduce deal volumes in the longer-term
  • We therefore believe Q2 2022 could see a slowdown in the level of activity seen until now, impacted by price increases and supply chain slowdowns. We believe that shareholders and investors will be more cautious and patient but willing to transact for the right terms

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

Spain

  • Overall, Q1 2022 has shown strong M&A momentum in Spain, continuing the tail winds of 2021, with large transactions expected to be closed such as the investment in LaLiga by CVC,[25] Cinven’s reinvestment in Ufinet Latam,[26] and Carlyle’s acquisition of Grupo Altadia.[27] In the early stages of the year, important transactions have been announced in the middle market, like the acquisition of Educaedu by Miura,[28] GED’s acquisition of Cinelux from Nazca[29] or the investment of Vitruvian in Civitatis.[30] These transactions suggest that 2022 has the potential to be another productive year for private equity investing – due to the ongoing high levels of dry powder available and the interest from international funds – albeit not at the record levels seen in 2021
  • The leading driving force for this activity remains the Technology & Software sector, followed by Healthcare and Business & Tech-Enabled Services - the latter having recovered significantly in 2021 and likely to continue its momentum in 2022. Conversely, Consumer, Leisure & Retail is losing relevance both in volume and number of transactions[31] due to supply chain issues and rising cost of materials and energy, making the sector less attractive to investors
  • The macroeconomic situation has been deteriorating in Spain as the year progresses, with a continuous inflation increase[32] (especially in commodities and energy), rising interest rates, and geographical uncertainty already resulting in the slowing or even cancellation of deal processes – particularly in the Industrials and Consumer, Leisure & Retail space as supply chain issues and waning consumer demand impact businesses
  • We therefore believe that there will be an investor preference for sectors that have already proven themselves more resilient, such as Education, Technology & Software, Healthcare, and Infrastructure – particularly in renewables – as governments and consumers turn to alternative energy options to combat rising energy prices

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022

UK

  • UK M&A deal volumes for Q1 2022 have fallen 52% versus Q1 2021.[33] While volumes remain consistent with levels experienced in 2019 and 2020,[34] it is apparent that dealmaking momentum in the UK has continued to dwindle
  • Despite the decline, deal making in Q1 2022 should be viewed as a return to ‘normal’, as the 2021 Covid-driven boost has mostly dissipated, and we see funds turning their attention to replenishing WIP lists after a year of focus on exits
  • Whilst the Technology & Software and Business & Tech-Enabled Services sectors again accounted for the vast majority of the UK’s total deal activity in Q1 2022 (representing 49% and 29% of total UK deal flow, respectively),[35] we are beginning to see a number of businesses that are more cyclical in nature coming to market. In particular, we are seeing this increased activity across the Infrastructure Services, Recruitment and broader Industrial segments. Typically, the cyclicality of these opportunities means that financial sponsors are finding it harder to price investment risk, causing slow processes or even, postponement
  • Looking forward, we anticipate that deal volumes across these cyclical sectors will increase (given their abundance), and we also predict a strong recovery in the UK travel sector, as consumers look to take overseas trips following the lifting of Covid-19 travel restrictions[36]
  • A key trend that we are seeing with greater frequency is financial sponsors backing existing investments by moving winning assets into new funds and continuation vehicles. Typically, in these instances, sponsors will look to bring in additional third-party providers of capital to firstly allow them to realise some of their own investment, but to also attain sufficient funding for the next stage of growth. In an uncertain geopolitical market in Europe, this trend appears set to continue, as private equity funds double down on: assets which they’re comfortable holding on to; top-performing management teams; and successful business models - especially if these businesses are expected to achieve premium valuations at a later date
  • We are seeing that private equity pipelines have diminished in size, as sponsors have declined to engage in processes which they believe to be more marginal. Instead, we are seeing sponsors opting to pursue short lists of ‘select’ longer-term buyout targets with greater rigour. Further to this, now that deal activity in the UK market has slowed relative to H1 2021,[37] we expect a rebalancing in valuations across all sectors, as sponsors have been afforded the breathing space to review new opportunities with heighted scrutiny and to deploy capital on a more selective basis
  • In tandem with a dampened domestic M&A market, there are signs of clouds gathering on the horizon for the remainder of 2022. The situation in Ukraine is having a material impact on global commodity and energy prices, which in turn, is beginning to feed into the UK market in the form of increased inflationary pressure and a higher cost of living[38]. Rising inflationary pressures has led the Bank of England to increase interest rates to their highest level since March 2020 (0.75%),[39] which in the short-term we anticipate will prompt UK sponsors to speed up processes and to complete on active deals before the debt funding window becomes more expensive.[40] Following this, we expect deal activity to become somewhat subdued, as private equity purchasers likely opt to remain on the sidelines of processes whilst they assess the impact of rising inflation and tighter monetary policy measures on business operations - though the longer the funds wait to deploy capital, then greater the pressure becomes to keep up with target deployment rates
  • To combat pressures on global supply chains, we expect to see two trends in UK M&A emerge:
    • We anticipate a re-focusing of investor mindsets to consider more UK-based deals that have limited operational exposure to European jurisdictions with more favour
    • We expect bolt-ons to become more focused on vertical integration (upwards and downwards), as sponsor-backed companies aim to secure key raw materials and control how products are distributed[41]

Source: Q1 2022 European mid-market deal data, Mergermarket, 01 April 2022