DIGITAL TRANSFORMATION

Barry Duncan

Amid what feels like increasingly uncertain times, demonstrated by growing numbers of extreme weather events, destabilising political changes, unexpected and unnecessary armed conflicts and the occasional global pandemic to contend with, it is hardly surprising that global economic growth has taken a bit of a hit over the course of 2022. As with earlier periods of low growth, that manifests itself by reduced M&A activity. At least for a time.

PRIVATE EQUITY INVESTMENT ACTIVITY DECLINES IN 2022

Last month, Bloomberg Law reported that global M&A deal value amounted to $504 billion in the third quarter of 2022. That half a trillion deal value was about half the equivalent value invested in the third quarter of 2021 and, apart from the calamitous second quarter at the start of the COVID pandemic in 2020, the lowest quarterly recording since 2017.

Data presented by Unquote shows how this decline in M&A activity has been replicated within European private equity markets. Deal volume for the first three quarters of 2022 was down about 25% compared to the equivalent period in 2021, which was an admittedly exceptional year of investment activity. Deal activity and value in Q3 of this year declined more than 40% compared to the same quarter in 2021, so it will be interesting to see if Q4 activity bounces back with all the turmoil going on. This is particularly true for the UK where consumer and business confidence have taken a bit of a hammering of late.

Most private equity firms and professionals have endured economic slowdowns in the past, with many of the longer-tenured having had to weather multiple ‘crisis’ over two or three decades. Those that came out stronger from those crisis-testing experiences, learned how to concentrate upon operational improvement to existing portfolio companies, in anticipation of the right valuations for both timely exits and for new investments, and for when M&A activity recovered. For example, during the Global Financial Crisis (GFC), Bain Capital redirected its investment professionals to protect and improve the firm’s existing portfolio, rather than seeking out new investment opportunities. That sort of operational focus has traditionally concentrated upon fairly standard value creation opportunities along the lines of improving salesforce efficiencies in order to grow revenue, fundamental cost management exercises, including supply chain efficiencies, improvement to working capital efficiency and talent enhancements.

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