Overview of H1 Trends and State of the Market

Deal activity was down for the first half of the year in comparison to the previous period, with market conditions causing a major slowdown in large deals with a clear dip in multiples paid for businesses. As many PE funds focused on the health of existing portfolio companies, the volume of PE deals sank lower than the historical share of activity across Europe. That is due in part to a challenging exit environment and heightened limited partner scrutiny. Deal activity was more heavily weighted towards private company and corporate activity overall, which will likely continue during H2, although there are factors that are likely to push more PE deals to the fore.

A mini crisis in the U.S. banking sector also caused further uncertainty, but broader impacts were contained successfully.

Macro trends impacting the market

Inflationary pressures and rising interest rates coupled with recession risks in Europe, means there are still market factors creating caution amongst investors.

H2 M&A Outlook

Though market conditions remain challenging, investors are getting more comfortable with the uncertainty in the dealmaking environment and are under pressure to deploy capital. With fundraising appetite also growing, funds are assessing M&A deals in earnest to expand and grow market share.

Amid some of the challenges noted above, several factors contribute to the early improvement in the M&A market. For example, expected changes in taxation stemming from upcoming general elections in the UK have motivated many sellers, especially those in founder-owned businesses. PE fundraising cycles are also prompting general partners (GPs) to move forward with some deals. Many GPs need to show exits before they can raise new funds, which has forced a rethink of GPs’ strategies. There are also cases of funds coming to the end of their life but that still have one asset left to sell, looking for buyers.

There continues to be strong demand for quality assets. They still get premium valuations and see significant interest from various types of buyers. In particular, anything that can be considered impact investing or infrastructure is especially popular. In some cases, investors are still paying historically high multiples and going above market to get quality assets..

For private owners with businesses performing reasonably well, some are deciding to take the opportunity while the window is open, having gone through several major crises in the past few years. The expected increase in taxes is also driving a rush to close. There are other deal drivers across Europe that are more local and regional, which have helped push forward private company transactions and indicate a rise in M&A for H2 and beyond.

The market for corporate and private deals will likely remain similar, but the fund and institutional deal market will change. We expect to see a marked increase in the number of secondary deals over the coming 12 months. PE is feeling pressure to increase speed and catch up after a relatively slow past 12 months, so those funds will seek liquidity through secondaries and other transactions.

Lincoln International expects four key deal drivers for the remainder of 2023 and beyond:

1. Digitalization and business transformation
2. Regulatory changes and environmental, social and governance (ESG)
3. Supply chain management and consumer behavior
4. Infrastructure and energy

How to be prepared in the current market

There will be opportunities for strategics and PE to find strong assets at a reasonable valuation. However, the market is still not nearly as robust as it was in recent years. Buyers need to be calculated and entrepreneurial if they want to make successful deals. They should be mindful of potential risk while looking for opportunities and preparing to strike a deal when the moment is right.

Debt will be one of the most important factors for any deal in H2—and it will come at a premium. For anyone considering a sale, it’s best to be properly prepared and understand the available options in the debt markets.

Companies looking to make M&A deals in the second half of 2023 should ensure they take the following steps to pave the way for a transaction and growth: