Corporate optimism declines, M&A opportunities for PE on the rise

PE sponsors are sitting on record-breaking levels of capital, while the corporate deal-making cycle may be winding down

A growing sense of caution is dulling corporate optimism and dealmaking bullishness, opening the way of increased PE activity, according to PE Horizons 2022: volatility means opportunity.

'Only a few months ago, we expected corporates to continue to dominate M&A in 2022. Instead, we are seeing market volatility around the war in Ukraine, inflation and rising interest rates creating more opportunity for PE sponsors,' said Partner Kounny Rattley.

'PE is sitting on record-levels of dry powder and fundraisings are ongoing. With capital markets in 2022 already wobbling and predicted further falls, there may be a market correction which will spur an increase in both PE take-private approaches and the number of those that are successful.'

Exits in 2022 are expected to remain at elevated levels, consistent with 2021. However, it will be challenging for sponsors to undertake exits via IPO or dual track processes this year. Trade sales will remain the favoured exit route and an increase of secondary exits in 2022 is predicted.

'Successful IPOs are invariably driven by market sentiment – the current market and fiscal uncertainty seems to suggest that sponsors will struggle to successfully list their businesses on the ASX until some stability and, ideally, optimism, returns. To the extent we do see sponsor-backed IPOs in 2022, our expectation is that stable businesses with defensive characteristics will be preferred over growth and technology assets,' said Partner Noah Obradovic.

Other key observations

• Demand for warranty and indemnity insurance will remain high. Some capacity has returned to the market, but dealmakers can expect slow turnaround times to persist.
• Volume in both the Australian leveraged loan market and the direct lending market is expected to grow.
• PE portfolio companies continue to be lucrative targets for ransomware attacks.
• An ESG focus is now manifest in the fundraising process, with institutional investors increasingly seeking to conduct ESG-focused operational due diligence on PE sponsors.