What does 2023 hold for the deals market?
Gregg Pendlington of DSW’s Corporate Finance team sets out what buyers, vendors and investors can expect in the year ahead.
What does 2023 hold for the deals market? 2023 will not deliver the same deal volumes as in the bumper year of 2021 – but if the inflationary environment eases, and in the absence of any further economic shocks, confidence will return.
Deals will still get done, but it will take longer to get them over the finishing line. Deals activity declined at the end of last year after a very buoyant 2021 and a strong start to 2022. Whilst international and domestic macroeconomic factors played their part, it was never going to continue at that pace.
A few factors are at play in the current environment. The debt funding market is temporarily constricted and the cost of debt has increased, and political disruption and the cost of living crisis have made buyers generally more cautious.
Any buyer pool is more likely to be more comfortable with horizontal deals – buying a competitor or a business in its own industry – rather than vertical deals which introduce new products and services or open up new areas, even though these tend to be the more strategic and transformative.
Therefore ‘buy and build’ deals and ‘tuck-ins’ will continue to be prevalent but some buyers will prioritise risk over returns potential and “stick with what they know”. Buyers will also want to do more due diligence and scenario-test forecast assumptions, elongating processes and timeframes.
However, with these conditions comes opportunity and buyers are now in a relative position of strength. There is no doubt the current market holds opportunities for them, and it is worth taking a long-term view.
While the situation is more challenging for sellers, there are strategies they can follow to put them in a greater position of strength, such as carrying out their own vendor due diligence and driving the legal terms. This keeps control of the process and maintains competitive tension, both of which go to value.
There is still an abundance of capital although investors are hyper-sensitive to downside risk. There are always ups and downs in the deals market but if the economic recovery is swift, and the interest and inflationary environment stabilises, then confidence will return and deal volumes will be boosted.
Gregg is a partner of the DSW Corporate Finance team in the North West. He is a Chartered Accountant, FCA qualified and holds the Corporate Finance Qualification from ICAEW.
If you would like to know more, get in touch with Gregg here.