Market Spotlight: European Deal Momentum

By Suzy Bibko, Content Marketing Manager, EMEA

With the rollout of vaccines across Europe, many are hoping that life will soon start to return to normal – or at least a new form of normal. What does this mean for M&A in the region? What will drive deal momentum there? We asked these questions to Piers Prichard Jones, Dwayne Lysaght, Merlin Piscitelli, and Joana Rocha Scaff at a recent webinar in partnership with FT Live and moderated by Kaye Wiggins.

A frenzy of activity
Whether driven by COVID fatigue, optimism, or resilience, there seems to be a resurgence of deal activity around the world. In fact, according to a new report, M&A is expected to grow 45% over the next three years, up from 30% over the past three years (https://www.bain.com/insights/topics/m-and-a-report/).

Piscitelli believes this certainly seems to be the case in Europe: “I like to call what’s happening right now ‘exit optionality’. There is a lot of activity in the market. Restructurings were up and then M&A was down, but now we're seeing IPO markets becoming busy, and private equity has the most amount of dry powder that they've ever had. Equity markets are at all-time highs, leading to corporate balance sheets that allow them to be very aggressive in the M&A game. And debt financing is also extremely cheap at this time, too. So, all cylinders are firing at once, and I think that's what's leading to these extreme levels of activity within the market.”

And it’s likely that there is still more to come, especially on the restructuring front. “We've seen increased activity on our platform in terms of the number of restructuring projects,” explains Piscitelli. “Maybe they're ahead of the curve, but we're definitely seeing them start to come to fruition. And there's a lot of talk that when this crisis is over there will be businesses that were broken before and have not recovered with the rest of the economy, and those will have to be restructured. So, we expect to see more carve-outs and a rise in the number of insolvencies because they won't recover at the same rate as or with the economy as a whole.”

“We haven't seen the weight of restructurings yet,” agrees Prichard Jones. “If you're seeing a slowdown in SPACs or a slowdown in M&A, generally that will be because of various factors, which will lead to an increase in restructuring. So, I think whether there are a few spikes in IPOs, or conventional M&A, or restructurings, the market is going to remain busy.”

Private equity versus public markets
There’s no doubt that private equity is playing a role in this increased market activity. “There is a proliferation of private equity and finding routes to acquire companies,” sat Lysaght. “So, there’s almost a widening of routes for private equity, and the public markets, if you like, are a form of that. We have seen this trend before, and it tends to trend towards the top of equity markets, rather than necessarily at other stages in the cycle. But I think we will see it continuing.”

And what about the public markets? Lysaght thinks activity there will continue, too. “I think the public markets are always going to be a very attractive route for companies, whether they're private companies looking to go through SPACs or whether it's the more traditional IPO, of which the volumes are also extremely healthy at the moment. All have their pros and cons, relative to the specific asset.”

However, it’s important to look at historical trends to see how this all might play out. “Obviously there is significant dry powder in the private equity market, building upon a true secular trend of investors shifting allocations towards the private market,” explains Rocha Scaff. “While we've seen a significant resurgence of interest recently in IPOs, SPACs, and public equity listings, this is actually a reversal of a long-term secular trend in developed markets. We've had fewer businesses overall listed in developed markets in the US and the EU, and companies have opted to stay private for longer. So, you have significant dry powder building in the private equity business that needs to be measured in the context of historical growing investment activity. As investors continue to shift allocations from public to private, I would expect to see the private equity market continuing to drive significant activity overall, but you need a few sound pillars underpinning it.”

“It's clear that there has been a bit of recruitment in SAPCs and IPOs in recent weeks, but I think it's probably also the case that the consequences of the SPAC activity are going to be felt for quite some time,” says Prichard Jones. “In the US, for example, there are approximately 400 SPACs that are looking for acquisition targets, and they usually have two years in which to do that. So, we can see the long tail. If there is a slowdown in SPACs and IPOs, that probably is evidence of a weakening and competence generally for macro and micro reasons, and you would expect to see a tail off in some of the other deal activity. But I think you could also raise an argument where if a SPAC transaction is off the table as an exit, perhaps that gives more scope to private equity or strategics than otherwise would be the case in the middle of the frenzy.”

One thing seems certain: this year could prove to be as interesting as last, albeit in a different way. Stay tuned.