Dealmaking has started slowly in 2023 but there are signs financial conditions are easing, according to analysis by this news service.
Yields on newly issued, sub-investment grade debt are normalising, equity markets are off to a quick start in the New Year and a host of financial sponsors are looking to launch or close big buyout vehicles in the next few months to make sure that they have capital to deploy in an environment that could yield strong fund vintages.
Could that point to a recovery in activity as the year progresses?
Financing conditions were a major drag on M&A activity in the second half of 2022 but there are signs that is changing.
A spike in yields across the ratings spectrum in both the leveraged loan and high-yield bond markets towards the end of 2022 has been one of the mostly commonly-cited reasons for a downturn in M&A over the period. Acquirors have struggled to access finance at the required size or price to execute deals, particularly larger ones.
But the first quarter of 2023 has so far shown a stabilisation of rates on leveraged loans and high yield bonds around the 6% mark. While the number of deals in syndication was at record lows in 2022, this year has seen a marked uptick in activity, with issuers rushing to refinance or extend existing debt.
Amidst the wave of refinancing activity – 10 loans totalling EUR 7.4bn and 19 bonds summing to EUR 6.8bn in the year through 13 February – there have also been opportunities in M&A debt financing. Six loans and three bonds have successfully navigated their way through the market so far in 2023, with French fashion house Isabel Marant even managing to get a EUR 60m shareholder distribution over the line as part of its EUR 265m note.
Signs of improvement for fundraising
Equity capital markets sentiment is also improving after a bruising 2022. Investor risk appetite was roiled by war in Ukraine and broader economic uncertainty. Europe’s benchmark Stoxx 600 Index is up 9% year-to-date and not far from highs set in February last year, prior to Russia’s invasion of Ukraine.
M&A activity followed European stock markets higher in 2021 and both declined in tandem last year. Going further back, equity market performance has historically been a weak indicator of future dealmaking activity but improving sentiment is likely a positive at the margin for companies looking to strike deals.
It also provides a positive backdrop for sponsors including Triton, which recently launched its sixth flagship buyout fund with a EUR 5.5bn target, as reported. Meanwhile, final closes are expected this year from sponsors including Clayton Dubilier & Rice, which is on the road for its 12th buyout fund with a USD 20bn target, according to media reports.
Private equity activity has been a big driver of M&A markets in recent years – helped by extraordinary levels of dry powder – but that unwound late last year. European private equity buyouts in the fourth quarter of 2022 fell to their lowest level since 2Q20 at just EUR 16.9bn.
Europe-focused fundraising has already begun the year on a positive note with over EUR 34bn raised in January across eight funds, the highest monthly total since July 2021. This was largely driven by two US-based funds – Dyal Capital Partners V and Warburg Pincus Global Growth 14, which each raised over EUR 10bn.
But fund launches are low by historical standards with just four launched through January. That’s the same run rate as the fourth quarter of 2022 – when 12 were announced across the quarter.
All eyes will be on sponsors who raised their most recent funds in 2021, many of whom will be returning to market this year. While private equity has typically performed well through crises, sponsors looking to fundraise will need to secure commitments in what many view as the toughest fundraising environment since the GFC.
Slow off the mark
Dealmaking has so far shown little sign of revival in 2023, despite improving financial conditions and hopes for some sizable fund launches. January saw just EUR 18.1bn of deals announced in Europe which would be the lowest monthly tally for over a decade, according to provisional Dealogic data.
Declining M&A activity was largely explained by a lack of high-value deals in the second half of 2022, a trend which has continued into this year. For those deals to come back, financial conditions have to improve and risk appetite needs to return.
While it’s too early to call a recovery on European M&A, there are some positive signals coming out of capital markets for now.
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