Chill in the deals market taking time to thaw
Against the backdrop of well publicised economic headwinds, the first half of this year reinforced the message that the deals market doesn’t like uncertainty.
Rising interest rates, record inflation and the cost of living crisis had an impact on consumer and business confidence which, along with factors such as the war in Ukraine and political uncertainty closer to home, caused a chill in the market with many deals being put on ice.
But there are early signs that a thaw could be on the way. With interest rates potentially stabilising, albeit at a higher level than many are used to, and softening inflation, we are starting to see a greater degree of predictability in the market that may be the catalyst to stimulate dealmaking once more.
Buyers and investors continue to seek homes for their capital as all parties adjust to the new normal, with implications for deal processes and the structuring of transactions.
The increased cost of capital needs to be factored into leveraged deals, and the impact on the underlying business of targets needs to be fully understood.
Deal timetables are likely to continue to be elongated, as buyers and investors take a deeper dive on due diligence and seek confidence in the deliverability of returns on their investments.
For target businesses, demonstrating resilience in all its forms will be key. Having faced many shocks over the past few years, investors will be looking at how businesses have recovered – seeking comfort from balance sheets and looking for ways to de-risk deals.
The increased use of earn outs and deferred consideration structures is likely to continue, as contingencies are built in around future performance, and buyers may, once again, favour a completion price adjustment mechanism.
From a legal perspective robust drafting will be required to protect deal value and seek to avoid disputes, with other solutions, such as insurance, being considered to address perceived deal risks.
As the market warms up, it is likely that investors will turn first to the strongly performing sectors. Energy, both oil and gas services and renewables, offers interesting prospects, with healthcare and tech, including biotech, cleantech and AI, also going from strength to strength.