2022 saw even fewer exits compared to the year before, indicating that the economic framework for exits has further worsened.
In the newly released 2023 edition of the annual CMS Private Equity Study, data was analysed from over 100 private equity deals on which CMS advised in 2022.
The survey found that overall deal activities remained strong until the third quarter of the year before a drop in the fourth quarter. With a decline in deal value and a slowdown in exit activities, the review revealed that a significant number of new investments were add-on acquisitions. Most (23 per cent) transactions involved the technology, media and telecoms (TMT) sector, followed by the real estate and construction (18 per cent) and the life sciences (17 per cent) sectors.
As an overall market trend, in line with general M&A deals, earn-outs were on the rise, especially when a private equity investor was on the buy-side – a clear sign of the market becoming more buyer-friendly. While ESG issues continued to be high on the agenda of PE investors last year, ESG isyet to appear specifically as part of the legal due diligence process and in transaction documents.
Valentina Santambrogio, Partner, CMS London and co-author, said: “While 2021 was a record year for PE deals, 2022 was still an active year. Given the difficult macroeconomic environment, we did naturally see a fall in exit activities. Nevertheless, we anticipate that there will continue to be opportunities, boosted by transactions arising out of distress/turnaround situations, or indeed, as a result of a need to diversify. There is a sense that the situation is more stable now than it was even a few months ago and so we remain cautiously optimistic.”
Dr Jessica Mohaupt-Schneider, Partner, CMS Munich and co-author, added: “As the world adapted to the post-Covid era, it was telling to see that digitalisation was no longer a deal driver and that entry into new markets continued to take leading priority. While there is most definitely greater investor caution, these are positive signs for the year ahead. Notwithstanding that many of the adverse economic and political factors that have impacted the market still exist, we are confident PE deal activity in Europe will pick up again in 2023 after the drop in the past months.”
Patrick Lühr, Counsel, CMS Berlin and co-author, notes: “After having a sellers’ market for quite some time, this seems to be slowly changing now. We have seen increasing buyer-friendly deal terms, including an increased use of earn-outs and more buyer-friendly liability concepts compared with previous years.”
Key findings:
- New investments vs exits: 2022 saw even fewer exits compared to the year before (eight per cent in 2022 vs 15 per cent in 2021), indicating that the economic framework for exits has further worsened. 85 per cent of the PE-deals analysed were new investments, whilst seven per cent were secondary buyouts (i.e. deals with a PE investor on both the sell and buy-side), which is significantly less than in 2021 (15 per cent). The 2021 trend whereby a lot of deals were add-on transactions further accelerated in 2022 (52 per cent of deals in 2022, compared to 43 per cent of deals in 2021)
- Deal drivers: Digitalisation was no longer a deal driver, showing that many PE funds had already implemented digitalisation strategies over 2020 and 2021, but also that tech asset valuations were not as attractive .
- FDI procedures: Over the past year, fewer approvals or clearances were obtained (eight per cent) compared to 2021 (15 per cent).
- Purchase price adjustments: Marked preference (80 per cent) for locked box (i.e. the purchase price is set upon signing, with no adjustments on completion). From 2021 to 2022, purchase price adjustment mechanisms decreased by roughly six percentage points in PE deals (whereas non-PE deals saw the use of purchase price adjustment mechanisms increase by three percentage points).
- Earn-outs: 12 percentage points increase in the use of earn-out provisions in 2022 compared to 2021 (37 per cent of all PE transactions reviewed). However, earn-outs were much more often agreed in smaller deals (45 per cent) than in higher value deals (seven per cent in deals over EUR 100m).
- Non-compete clauses: In 2022, PE buyers exacted more stringent terms – with 38 per cent of deals including a non-compete for longer than 30 months, whilst on trade deals only 24 per cent of transactions had a similarly long time-period.
- Management investment schemes: The use of vesting increased compared to 2021, though its terms have become more favourable to management in 2022– with shorter vesting periods (a time horizon between two-to-three-years having gained 17 percentage points over the four-to-five-years time range compared to 2021). On the other hand, leaver provisions were tightened – with both sweet and strip equity being taken back from bad leavers in even more cases (a 10-percentage-point increase compared to 2021).
- Sellers’ and buyers’ negotiation strength: Little movement overall in most of the other deal metrics from previous years. In some instances (e.g. increased use of “tipping” baskets rather than “excess only” baskets), we have seen buyer-friendly developments.
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