Deals are taking longer to complete, with investors showing more caution, but sectors such as life sciences are proving strong despite market uncertainty.
The pent-up demand from private equity in 2020 led to a booming M&A market in the subsequent years. Today though, the boom has tapered, with a climate of uncertainty caused by myriad events on the geopolitical stage.
UK capital markets have been effectively ‘closed’ to initial public offerings, but deal activity in the mid-market has been more robust. This is likely a feature of less reliance on the debt markets vs mega deals, and significant levels of private equity ‘dry-powder’, but also because competitive auctions for good assets remain strong.
The mid-market has become quite binary, however. Deals are taking longer to complete, and investors are more cautious and selective. Increasingly, investors are turning to ‘safer’ sectors such as life sciences, healthcare and technology because they tend to offer more secure revenues.
“There is more competitive tension around very good asset, but also, more investors are looking at ‘secure’ sectors that they probably haven't considered before. There is still strong demand from a life sciences point of view, but also anything linked to an underpinning of revenue, a secure cash profile, and longer term contracts.” Graeme Hurst, partner at BDO, leads our financial due diligence offering in Life Sciences.
Life sciences and technology are sectors that weathered the storm during COVID-19 and have remained robust in the post-pandemic years.
“Funds that typically had an anchor or specialism for their investment strategies have probably tilted a little bit more around healthcare, life sciences and tech,” Tom Holt, BDO partner, M&A.
Securing a deal is always about maintaining confidence and momentum through the process. In the current unsteady deals environment, those twin goals are more important than ever. Greater preparedness ensures our clients are in the best possible position for a sale, avoiding any last-minute nasty surprises and ensuring a smoother process in an uncertain world, all of which maximises value.
We combine our sector knowledge with the application of bespoke, sophisticated data analytics tools, allowing us to provide deeper insights during the pre-planning stage as well as more detailed due diligence, evidencing the value drivers of a business.
“We're diving into more detail in specific areas such as customer revenue forecasts. We can now analyse even more data from more sources thanks to our analytics tools. We have also heightened our focus on high risk or high opportunity areas within the due diligence process,” Hurst says.
With the cost of capital rising, we are also seeing opportunities for organisations to carve out non-core assets to reduce corporate debt, which has become very expensive.
Access to capital has become trickier with the current market uncertainty. With our sector knowledge and expertise in the debt market landscape, however, we are the right advisors to be able to guide you through the options available.
Some indicators suggest that over the final two quarters of 2023 we will see a rise in deal activity. There is an uptick in the number of data rooms being set up, hinting at the readiness of investors and companies to move forward with future deals, albeit upward pressures on interest rates remain an unhelpful headwind.
Despite the current uncertainty, private equity investors continue to deploy capital, and while capital markets remain largely closed, the outlook for the mid-market is looking brighter. Fast forward six months to a year from now and there will have to be an adjustment, even if that includes learning to live with high inflation.
“There comes a point where you live with uncertainty for so long, that even that becomes normal. You just adjust. I think we're at a point now where the market is adjusting to the fact that there is a war on the edge of Europe and there are high levels of inflation,” says Derek Neil, BDO partner, Transaction Services.
From a life sciences perspective, the outlook is even more positive. Our past successes working with organisations of all sizes proves that securing the right deal isn’t about large teams, but rather effective application of the right people.
Critically, our work is increasingly conducted through the lens of Environmental, Social and Governance (ESG). We have been developing our ESG credentials across our due diligence and M&A teams. Our focus on risk from an ESG perspective means our teams can identify operations that have a genuine sustainability claim, and those that don’t.
We see the impact of ESG reporting in the capital markets and IPOs. That focus is filtering into mid-market M&A, where investors are wishing to understand the ESG risks.
Similarly, the capability of artificial intelligence is accelerating daily, and although much is still unknown about how significantly AI will change the way we live and work, we acknowledge how profound a change it will be.
“Every private equity investment committee or potential investor will be asking themselves the question, ‘How could AI disrupt this business?’ And I don't think they know the full answer yet. AI will change things more than we realise but it'll probably take a bit longer than we expect,” Neil says.
With this expectation, an awareness of the twin impacts of AI and ESG permeate all our activity across sectors.
Through our propositions we guide clients through a journey powered by critical insights, applying leading technology to enhance these. Irrespective of the drivers for change in your organisation, we will ensure confidence and momentum to secure the deal your company needs.
Browse our most active sectors in our deal matrix and see a selection of our deals, by selecting a sector tile, for more information.