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Out-Law Analysis 6 min. read

‘Snowball effect’ will drive PE M&A deal activity in 2023

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A quieter period for private equity (PE) merger and acquisition (M&A) deal activity may be coming to an end, with signs that the market is recovering following months of economic and geopolitical turmoil in 2022.

Insurance brokers specialising in warranty and indemnity policies are already reporting around 25 to 30 new transactions involving these types of insurance products coming to market every day in Europe, which is a significant increase in activity compared to the latter part of 2022, when volumed had dropped by over 80%, and comparable to the levels recorded during the boom years of 2020 and 2021.

Differences in the expectations of sellers and buyers over valuations remain a barrier to deal-making in some cases, but high-performing assets remain popular and, with market conditions predicted to stabilise further as 2023 progresses, confidence in deal-making is expected to grow. With significant funds or ‘dry powder’ ready to be committed, a ‘snowball effect’ is possible – with a stronger second half of 2023 increasingly likely.

Buyers rediscovering their conviction

In our experience, market factors such as the war in Ukraine, energy crisis, rise in inflation and other pressures on consumer spending, meant many prospective buyers dwelled on their due diligence and adopted a ‘wait-and-see’ approach to target assets and their business performance in 2022. Where deals were done, they were often the product of opportunism – with buyers in some cases successfully encouraging sellers to revisit their valuations after embarking on marketing processes that failed to meet sellers’ expectations and striking a deal.

While the war in Ukraine continues and trading conditions remain challenging, there are positive signs of economic recovery – the Bank of England is predicting that inflation will fall to around 4% by the end of 2023 and continue to fall thereafter, while the FTSE 100 recently hit 8,000 points for the first time. Interest rate rises may also have reached a peak, which will help provide the debt markets with more stability. The prospect of less external ‘noise’ to muddy waters is likely to help buyers act with greater conviction as we go deeper into 2023 giving scope for parties to assess the valuation of target companies with more confidence.

Greater stability in the economy and financial markets makes it easier to compare seller valuations against comparable companies and valuations which have been sold. Stronger buyer conviction in turn will encourage more sellers to move to full auction processes, rather than bilateral off-market deals, where there is arguably more deal risk or where the risk of a less satisfactory result may increase, to complete a sale.

We have already seen a number of £500 million-plus value deals signed in 2023, which indicate that larger deals are progressing and that deal activity is not just restricted to mid or the lower mid-market.

In many cases, however, there remains a gap in valuation between buyers and sellers. In 2023 we expect to see creative deal-making as a means of bridging the valuation gap. We saw different structures used to achieve this in 2022, such as ratchet-based equity incentives for management teams rewarding overperformance – this encourages investors to pay a slightly higher price at the outset but gives the investor more protection where actual performance and returns are not as stellar as management may promise. We expect more of the same this year.

A mixed picture across sectors

With an estimated $250 billion of ‘dry powder’ ready to be deployed into investments in the European market, private equity houses are primed to act when they identify the right target companies at the right price. Some sectors are likely to be more attractive to these ‘conviction investors’ than others.

There has been a lot of recent attention on the technology sector amidst a wave of job losses, with big movements in the valuations in some listed companies. Yet, interest remains high from investors who still see opportunities to get in early in a market that promises high-growth and substantial returns. This sector is one where buyers are showing real appetite and conviction to invest, looking to take advantage of the uncertain economic backdrop, but we do expect to see prospective investors seeking to reduce valuation multiples that they might have had to pay to acquire technology companies only 18 months ago.

The focus of private equity investors has, however, been shifting. Consumer-facing sectors, even within the technology sector such as e-commerce, are sensitive to pressures on spending. There has been a resultant reduction in the value of some businesses in these sectors and an impact on sale processes and execution where buyer sentiment has been impacted

Investors are likely to remain attracted to the healthcare sector, where valuations have been more resilient to economic volatility. We are seeing emerging sectors such as infratech become more popular with investors as they see value growing from the drive to use technology and data to better design, build, operate and maintain infrastructure assets.

Exit strategies

We expect the decline in the number of initial public offerings (IPOs) to continue in the short-to-medium term, but conditions in the capital markets can change quickly – as the recent recovery in value of the FTSE 100 demonstrates. It can take months to prepare for an IPO, so PE investors that are considering that option for exit will want to start preparing now so that they are in a position to benefit when market conditions improve.

In 2023 we also expect to see a continuation of the popularity of secondary or tertiary buy-outs – where PE investors buy existing PE-backed businesses. In addition to the need for PE funds to continue to deploy capital, investors also need to achieve exits to demonstrate returns to their own limited partners. Some investors consider there to be less risk investing in businesses and management teams that have withstood the watchful eye of PE investors and achieved successful growth – though the scope for further growth for a secondary PE investor must exist for these sorts of deals to happen.  


The environmental, social and governance (ESG) agenda is an increasing factor in deal-making for both buyers and sellers.

There are a growing number of impact funds that are focused on investing through the ESG lens, while other buyers are also doing increasing due diligence on the ESG credentials of target businesses amidst growing regulatory and reputational pressures to channel investments to green and ethical projects and businesses. In this environment, the way sellers position and market their business in respect of ESG is becoming increasingly important.

In 2023, we are increasingly seeing investment decisions being shaped by ESG considerations as they have a higher level of importance and weigh heavier with investment committees and in their investment decision making. Demand for specialist ESG due diligence providers is growing as a result, and ESG factors will seep into many aspects of the deal process, including warranties around compliance with environmental laws, governance and anti-bribery.

Merger control

Merger control and public interest regimes have been tightened in a number of jurisdictions in recent years, including in the UK with the National Security and Investment Act 2021(NS&I).

Last year, sellers and buyers, together with their advisers, were coming to terms with this new regime, seeking to understand what impact it may have on deal processes and transactions. As the regime is drafted widely, potentially capturing businesses that parties may not initially consider to be impacted by it, and requiring notification, advisers have been adopting a cautious approach, choosing to seek a pre-notification and wait for the Secretary of State’s response before completing.

We expect this ‘safety first’ pre-clearance approach to remain prevalent in 2023. However, the approach being taken by parties is far from uniform and no single accepted way of dealing with NS&I where a notification is to be made has, as yet, been blessed by the market.

In some circumstances, parties are notifying the Secretary of State during due diligence, enabling signing and completion to occur simultaneously once a favourable response is received. In other cases, sellers are pushing for contractual certainty from buyers first before notifying, with the sale agreement being conditional on approval being received from the government. However, there may be time pressures to get a deal done in other cases and so – given the risk of deals being unwound if they are found to present a risk to national security – we expect to see a growing number of sellers seeking to pre-empt any issue on NS&I with the aim of achieving a consensus on whether to notify or not earlier in the deal process by commissioning their own analysis and sharing this with potential buyers during the due diligence phase to reduce deal or timetable risk.

Take confidence from the resilience of businesses

Despite challenging trading conditions in recent times, there remain a lot of robust businesses that are doing well. As economic sentiment improves, we expect that to build confidence, particularly in the debt markets, and this will encourage private equity to invest. While the picture differs across sectors, businesses in many parts of the economy will be attractive to investors.

We are quietly confident that 2023 will see momentum back into the market – perhaps not at the multiples witnessed in 2020 and 2021, but there will be less of an emphasis on deals driven by underperformance issues and more deals done involving healthy businesses with good scope for growth and in increasing volume as the year goes on.

Co-written by Kieran Toal of Pinsent Masons, Simon Cope-Thompson and Jamie Hutton of Arrowpoint Advisory, and Ella Shillingford of Howden M&A. Access the full PE M&A report 2023 here



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