2023-12-15 14:11:03
The mergers and acquisitions business is being dampened by the reluctance of private equity. According to calculations by the data service provider Dealogic, financial investors contributed 28 percent to the total volume of all mergers and acquisitions (M&A) in the world this year – while they contributed around 40 percent in each of the previous two years. However, these were also high values. The proportion is now back to the level that was common in the middle to late last decade.
Seen in this way, the event can be seen as normalization. This year, the M&A business has shifted more towards companies – known as “corporates” in investment banker jargon. “We have seen a very strong shift in activity from private equity to corporate transactions,” says Tibor Kossa, co-head of the M&A business of the American investment bank Goldman Sachs in Germany and Austria.
Financial investors acquire companies or corporate divisions in order to sell them on after a few years or take them public. In most cases, they finance the transactions to a considerable extent with loans – and these have become rapidly more expensive as the central banks have tightened their policies. “The rise in interest rates inevitably led to an adjustment,” says Ralph von Selzam, private equity expert at the French bank BNP Paribas in German-speaking countries. It’s not just bank loans that are more difficult to obtain. The equity capital that financial investors raise for their takeover funds is also flowing more slowly. In 2018 and 2019, only a quarter of the funds took longer than eighteen months to raise money, says von Selzam. Now it is about half.
Reviews are falling significantly
According to Dealogic data, the merger market as a whole is weaker this year than last year. As of December 11th, the volume of all projects in the world totaled 2.8 trillion (3,000 billion) dollars, which is a fifth below the level of the comparable period of the previous year, as the data service provider calculated for the FAZ. Goldman Sachs expects an additional volume of over $3 trillion for the year as a whole. Private equity deals have shrunk disproportionately in value over the course of the year so far, with the volume almost halving. In Europe it is at its lowest level in ten years.
However, due to its business model, private equity will sooner or later be forced to intensify its activity again – on both the buying and selling sides. On the one hand, the committed capital that is to be invested continues to grow: Based on Pitchbook data, Goldman Sachs currently calculates that the classic private equity companies are sitting on $1.55 trillion, which is more than ever before. There are also funds from venture capital companies, real estate and infrastructure funds. Stefan Povaly, head of the US bank JP Morgan in Germany, sees “massive firepower”.
On the other hand, investors want to get the funds that are already invested in company investments back after a few years, plus profits. Typically, the term of the funds that provide investments is ten years with a two-year extension option. “The funds will have to show exits,” says Berthold Fürst, co-head of Deutsche Bank’s global M&A business, who notes “increasing pressure” in this regard. He is already seeing signs that financial investors are increasingly returning – especially as the environment is easing. “The market for acquisition financing is recovering.” His colleague Henrik Johnsson, co-head of global capital markets business for Deutsche Bank, expects the interest rate cycle to end soon. “Central banks are probably at or near the peak.” JP Morgan banker Povaly agrees with the finding. “Fundability is back.”
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