Recent Trends and 2023 Outlook

A confluence of macroeconomic forces—including persistently high inflation, rising interest rates and broader concerns about a potential recession—further compounded market volatility and political uncertainty, which led to a marked decline in deals during the second half 2022. In particular, European businesses were acutely affected by unrest in Ukraine and the resulting spike in energy prices. As some of those headwinds for M&A ease, European deal activity will likely return with renewed momentum in 2023.

According to Refinitiv, global M&A value in 2022 declined 37% year over year, and H2 saw a 33% dip compared to H1. Similarly, European target M&A decreased by 39% compared to 2021. However, 2022 deal value still exceeded 2017’s total, and it wasn’t far off the pre-pandemic average.

As some buyers and sellers have remained on the sidelines in recent months, that sets the stage for resurgent deal activity in the year ahead. Markets have seen a wave of repricing, and more opportunities are starting to emerge as a result.

While there may be continued tightening of monetary policy in the near term to help clamp down on inflation, investors anticipate that central banks in Europe are unlikely to pursue interest rate increases comparable to what the Federal Reserve has done in the U.S. Additionally, eurozone finance ministers agreed in September to coordinate fiscal policies with European Central Bank actions to avoid worsening inflationary or recessionary pressures, which can also help prevent the cost of capital from being prohibitive for dealmakers in Europe.

In further contrast to the U.S., inflation across Europe has largely been driven by the rise in energy prices, according to monthly data from the EU’s Eurostat office and the UK’s Office for National Statistics. Fortunately, that data shows both the overall annual inflation rates and the inflation rates for energy have eased since peaking in October, which signals inflation has probably peaked.

Rising base rates and widening margins have had a profound impact on deal structures and valuation. With unitranche debt becoming more expensive and leverage multiples at significantly lower levels, we see a return of structures  including subordinated debt, which were more prevalent decades ago when interest rates where much higher. Higher cost of debt and lower leverage multiples are evidentially impacting valuation and we observe this in most of the deals on which we advise across the region. At the same time, we continue to see private debt funds taking market share away from banks in the LBO markets due to tightening capital requirements and significant inflows in private credit funds.

While uncertainty remains, the economic environment has stabilized somewhat, which helps encourage M&A activity. We have already seen an increase in pitch activity in Europe looking to Q1 deals, and that is likely to continue rising through Q2 and into H2. Specifically, both PE funds and debt funds have ample capital available and are now behind their deployment curve, so they will be eager for suitable targets. With high levels of dry powder, in some cases, the ratio of PE-backed M&A is likely to rise in 2023.

Four Deal Drivers in 2023 and Beyond

Against the backdrop of those macroeconomic factors and easing uncertainty entering 2023, there are four key deal drivers that apply across most sectors.

There are many factors at play for both the broader economy and each individual business’ performance, but we see these trends playing a large part in determining which investment decisions maximise opportunity for years to come. The future looks bright for dealmaking in Europe, and as market volatility subsides, deal activity will be ascendant once again this year.