Private equity dealmaking suffered in the final quarter of 2022 as firms battened down the hatches amid ongoing market instability and treacherous investment conditions.
The environment for exits also worsened last year according to data from CMS, with the just 8% of exits compared to new investments, compared to 15% in 2021.
About 85% of the PE-deals analysed were new investments, with 7% of those secondary buyouts with a PE investors on both buy-side and sell-side – significantly less than in 2021 (15%).
CMS said that the 2021 trend of many deals being add-on transactions further accelerated in 2022, making up more than half of all deals compared to 43% in 2021.
The report said 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.
There was a 12 percentage point increase in the use of earn-out provisions in 2022 compared to 2021 (37% of all PE transactions reviewed), with earn-outs much more often agreed in smaller deals (45%) than in higher value deals (7% in deals over €100m).
PE buyers also exacted more stringent terms than trade buyers, with 38% of deals including a non-compete for longer than 30 months. Only 24% of trade sale transactions had a similarly long time-period.
Valentina Santambrogio, partner at CMS London and a co-author of the report, 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.”
Fellow CMS partner and report co-author Jessica Mohaupt-Schneider 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.”
CMS, which was founded in 1999, is an integrated, multi-jurisdictional organisation of law firms that offers full-service legal and tax advice.
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