M&A booms in 2021 as investor confidence bounces back

Analysis of the combined transactions data of Pinsent Masons, Howden M&A and Arrowpoint Advisory (40-page / 4.7MB PDF) showed that deal value rose 54% in 2021 compared to 2020.

The average transaction value across all deals was just under £198 million, significantly up on the average seen in 2020. At £235m, the average private equity transaction was significantly higher than the average trade transaction (£143m), consistent with previous years.

Assets in sectors less impacted by the Covid-19 pandemic attracted some of the highest valuations and the most aggressive deal processes. Sectors seeing high levels of activity included technology, financial services, life sciences and healthcare and ‘digital’ retail and consumer.

There was private equity activity across all sectors, but the data showed a slight shift away from highly prospective digital assets towards those with strong levels of predictable and recurring revenues – with such companies attracting the highest valuations and most aggressive deal processes over the last 12 months.

Corporate law expert Tom Leman of Pinsent Masons said: “The various periods of lockdown over the past two years have lit a torch under those businesses that supported remote working and living, or were ahead of the digital revolution and had business models that were set to thrive in a distanced world.”

The data showed an uptick in the number of auctions and investors focusing on competing for a smaller number of assets. Auctions accounted for 58% of private equity transactions, the highest level for five years, and just over 70% of transaction value, with an average of £289m.

“The increase in competitive auction processes reflects the increase in seller negotiating power from the less confident times of 2020,” said private equity expert Edward Stead of Pinsent Masons.

The increased demand and limited supply have led to investors either looking at earlier stage investments or being prepared to pay much higher valuations. However, the length of time needed to complete deals in 2021 appears to have increased, with 53% of the transactions taking more than six weeks to complete, where exclusivity was granted.

Within private equity, there were more secondary buy-out processes, impacted by the trend for some incumbent private equity houses to pass investments from an old to new (or continuation) funds, where the price that third-party buyers were prepared to pay did not match sellers’ price expectations.

The competition for assets in a strong sellers’ market was reflected in lower warranty liability caps for investment warranties, and lower restrictive covenant periods of 24 months or less when in previous years a much higher proportion were subject to a longer restrictive covenant period. “Shorter restrictive covenant periods are attractive to management teams and therefore a key lever for investors to propose within a package of investment terms to win over management teams particularly in competitive sale processes,” said Pinsent Masons private equity expert Kieran Toal.

High levels of private equity activity have continued into 2022, despite the uncertainties created by the war in Ukraine. However, there may be signs of a slowdown in secondary transactions, and due to the impact of the conflict on UK stock market valuations, there IS likely be an increase in public to private transactions.

The implementation of the National Security and Investment Act in January, which requires businesses and investors to notify the government of certain acquisitions across 17 sensitive areas of the economy, including defence, transport, civil nuclear and artificial intelligence, may well have an impact, with an inevitable increase in relevant transactions being subject to a gap between exchange and completion.

Private Equity M&A Trends 2022 (40-page/4.7MB PDF)