Market Trends

Despite wider market headwinds, M&A activity remained strong in 2022. Overall deal volume was down just 2% against the backdrop of a bumper deal year in 2021, and as with previous years the mid-market was dominant again as a key driver of deals in 2022. Deals were spread across a range of business sectors, with financial services and technology deals in particular dominating last year, and deal volumes in real estate, infrastructure and renewables also grew. 

Private Equity in general weathered the Covid storm, and following a bumper year in 2021, deal activity continued to be strong last year with PE accounting for a fifth of deal volume in Ireland in 2022. Despite continued macro headwinds, Irish dealmakers are cautiously optimistic that 2023 will be a busy year in PE deals. "Dry powder" or unspent PE capital is high, and appetite for high quality businesses with resilient business models is particularly strong. Buy-and-build continues to be a strong feature of the PE market, wit investors putting significant capital into their portfolio companies to fund consolidation plays; as well as continued investment in organic growth, digitilisation and building businesses of scale internationally. There are some challenges which will impact on deals; most notably that there are some valuation gaps between seller and buyer expectations, the cost of debt has risen, deals are perhaps more complicated to complete with due diligence increasingly extensive, sustainability factors and ESG due diligence are a key focus, and eal structuring is liely to continue to be an important enabler to successful deal outcomes.

What are the factors that result in a successful deal?

The first factor is being clear on what it is you, as the founder of the business or the management team, want from a deal and the PE investor. The range of sources of equity is extensive – from traditional PE through to dedicated impact funds, specialist minority funds, infrastructure funds, patient capital, family offices to name but a few - and understanding the optimal type of investor and deal structure will help to drive the decision as to the right partner for a business.

Some funds target businesses they believe could be performing below their potential and could be made more valuable when the fund deploys their operational and turnaround expertise; which can create significant value uplift in the right circumstances. Others like to focus on a particular sector or investment type; such as infrastructure assets or sustainable investments. At present we are seeing a vibrant domestic PE market driving significant activity, a very active cohort of international investors readily seeking investment opportunities in Ireland and, as with last year, particularly high interest in businesses in growth sectors such as renewable energy, life sciences, financial services, business services and healthcare. Sustainability factors are unsurprisingly even more prevalent now; and we expect will continue to play a key role in dealmaking this year.

Secondly, a business that can prove that it has been resilient in a difficult trading environment will attract a higher market valuation. In the current market, investors are particularly attracted to those businesses that can demonstrate how they have grown through the Covid-19 pandemic and beyond, and/or are disrupting more traditional market players and using innovation to drive accelerated growth.

Thirdly, those founders who can demonstrate strong unique selling points or points of differentiation which allow them to be influential in their chosen market and have a defendable market position will always catch the attention of potential investors. In telling the story of the business founders who achieve strong valuations often do so by highlighting key success factors such as their strong customer relationships, predictability of revenues, strong and sustainable growth rates, a scalable platform for growth, a well invested business and team and the ability to grow margins.

What should I do to prepare?

1. Time and again those founders that prepare well in advance tend to have better outcomes than those who don’t plan in advance. Understanding and articulating the unique selling points of the business to grab the attention of investors and get them excited about the scale of the opportunity is fundamental and often doesn’t get enough focus early on. Equally important is preparing for due diligence (financial, tax, ESG, technology, legal, commercial etc) and considering some element of vendor due diligence on key risk areas helps to underpin a successful process and position the business for an optimal outcome. In my experience, it is better to spend the appropriate time preparing in advance of engaging with PE investors; and a longer preparation period typically enables a quicker and more competitive process; maximising shareholder value and management terms.
2. Founders should address any potential issues well in advance of a deal. These issues often emerge in areas such as tax (corporate or shareholder tax planning), the requirement to renew key contracts or tenders, other legal or contractual issues, etc – but it is much more preferable to identify and address these pre-transaction rather than have a buyer or investor identify them mid due diligence; which can undermine a process and valuation.
3. The potential benefits of a well-considered business plan are significant. The investor is primarily interested in the future growth of the business. This being the case, a founder who can systematically articulate (supported by a financial plan) the future shape of the business and the enablers of growth will be highly attractive to investors; as it allows a potential investor to consider the base case plan presented by management, sensitise it and consider other potential upsides and ultimately to value the business based on the future as well as the present.
4. Finally, one of the key challenges to executing a PE deal is management capacity, particularly the finance function. It is vital that the Chief Financial Officer and Chief Executive Officer have the capacity to both complete the deal and run the business simultaneously. This may require investment in additional resources in advance of or during the sales process; and is significantly aided by an appropriate preparation period in advance of sale.

Ultimately, private equity should be a win-win for the founder, the management team and the fund; enabling the business to grow at an accelerated rate with the support of experienced investors and generating a significant financial uplift for all shareholders on the ultimate exit; with original founders or investors often retaining a stake in the business through the PE journey. Given the level of PE dry powder and the overall attractiveness of Ireland as a market; there is significant available capital for quality businesses with robust business plans and ambitious management teams seeking PE investors. Finding the right partner is key and spending time at the outset understanding the optimal deal structure, what you are looking for from an investor and preparing well should help to set the business up for a smooth and successful process.

Please note that this is an Irish Times Content Studio Production and first featured in the Irish Times on Thursday, 9 March 2023 and was re-published kindly with their permission on our website.