M&A forecast for 2023: the role of private equity
High inflation, the rise in interest rates and their effect on the financing of M&A deals are having an impact on the market. However, experts are predicting that private equity investments in Spanish companies will set a new record in 2023.
Private equity firms will play a key role in company growth and in market concentration in certain sectors. Competition in this sector is significant, and in spite of the prevailing cautiousness, many players are focusing on the most defensive, counter-cyclical sectors. These include Real Estate, Food and Drink, Software and E-commerce.
How to value companies in 2023
Before tackling a merger or acquisition in 2023, a thorough analysis of the target´s long-term objectives will be more important than ever. Current trading analysis becomes less useful in the current scenario, as its capacity to reflect a company´s true position is inadequate a volatile market.
Earn-out clauses will become more and more common. These clauses provide a valuation mechanism which ties part of the transaction amount to the performance of the asset during a defined time period. In other words, the purchase price combines a fixed part which is paid on completion, and a variable part which is fixed according to variable, objective criteria which are time-fixed. In recent times, large corporates including Telefónica, ACS and Ferrovial have signed deals which include earn-out clauses.
Sustainability issues are becoming more prominent in valuations by private equity firms. Environmental, Social and Governance criteria allow a more qualitative valuation and they are now more appreciated, given that projects which can be described as sustainable are becoming increasingly attractive.
The European Commission has developed a sustainability taxonomy which classifies economic activities according to their degree of environmental sustainability. It aims to direct investments towards sustainable projects and activities, involving the financial sector in the decarbonisation of the European economy and in the achievement of UN sustainable development goals. Even though measuring ESG criteria and reflecting these in company valuations is still a challenge, this is a growing trend for 2023.
The rise of distressed deals
Political and economic uncertainty will give rise to many distressed deals aiming to restructure companies. On the one hand, there are investors with an appetite for risk, such as Special Opportunities divisions. On the other hand, there are also many prospects in M&A for interesting companies which are undergoing a difficult period due to market conditions in recent years. These companies require funds and are now available for a reduced price, or may offer the opportunity to invest through a restructuring.
Conclusion
In short, we expect private equity to continue to play a very significant role in the development and growth of Spanish companies this coming year. There is still plenty of liquidity and opportunities in the market. Many companies lack generational replacement or require finance in order to realise their growth plans.