Rhys Evans, Partner at international law firm Freshfields Bruckhaus Deringer, discusses his 2022 deal market predictions for the EMEA region with Ansarada.
As someone involved in the industry, you never want to be blasé about how long the boom will continue.Rhys Evans, Partner, Freshfields Bruckhaus Deringer
Ansarada: M&A activity since the second half of 2020 has been very high – higher than pre-pandemic. Do you expect this level of activity to continue over the next year, especially in the EMEA region, or will this taper off sooner than expected?
Rhys Evans: I completely agree with your observations, and I would add that the trend has really continued apace across private M&A, public M&A including P2Ps, joint ventures – the full spectrum of M&A activity. I think a number of practitioners were expecting or hoping for some sort of a summer lull, and that just hasn’t materialized this year.
There are a number of factors underlying this growth. Despite asset prices being incredibly high, there is a huge amount of financing available privately and on public markets, both on the equity and debt side. And then on the flip side, there are companies which have suffered enormously through the pandemic which are having a difficult time in terms of trading. For this reason, we are witnessing elements of distress in the market as well. These trends are coming together at the same time, which is pretty extraordinary. History tells us that at some stage there must be some sort of leveling out or correction in the market. Yet as we sit here today, it isn’t clear what the catalyst for that change might be.
Ansarada: Specifically on the private equity side, there has been a great deal of fundraising over the past 12 months. Do you see fundraising following the same track as M&A, and remaining robust, at least in the near-term?
Rhys Evans: Until something changes, it does feel like the high levels of activity will continue. There is a lot of money in the system.
Ansarada: Digital transformation is expected to be a key driver of M&A activity over the next 18 months. Do you expect digital transformation to continue to be an area that companies heavily invest in?
Rhys Evans: It is undoubtedly going to be a hot topic that’s with us for the foreseeable future. We are now deep into the digital transformation of the financial market sector, with a growing number of alternative banking-type products being offered by companies. We’ve seen the same revolution across healthcare. I think that will continue to spread, particularly among the more asset-heavy sectors, such as industrials, where a key part of their business going forward will rely on technology. Some of that change will come organically and some of it will come through M&A. To take one example, farmers being able to have data sent directly from their machines back to manufacturers and suppliers of the goods they’re using is a way that you will start to see technology impacting the industry.
Ansarada: Turning to another trend that’s emerged since the pandemic, we have seen a great deal more interest in ESG-related matters, especially on the renewable energy side. How do you think this trend will play out in 2022? Do you expect to see a large number of renewable deals?
Rhys Evans: It’s a great question and an area of the market where we’re seeing huge amounts of activity. It fits part of the wider narrative around the growing importance and awareness of ESG matters, which are now applicable to everyone.
I think we’re at a crucial point in the market where the tide is turning against some of the heavy and more polluting forms of energy production. And there’s a definite shift in investment towards renewables.
Ansarada: And looking ahead, what do you see as the biggest hurdles that dealmakers will have to overcome over the next 18 months or so?
Rhys Evans: There’s a bit of a list, isn’t there? With the market in its current form, the challenge for dealmakers is that they are operating in a bull market. So, the task is making sure that you have the right financing available to secure quality assets quickly. We’re seeing an incredible appetite for good quality assets. And allied with that is the need for sellers to increase the amount of preparation and forethought as to who will be on your side, who your buyers are going to be, what they’re going to be interested in, and how you can run the deal process efficiently to deliver maximum value at the end of it. But also, the market is underpinned by a nervousness as to what the future might bring.
Another key challenge is the regulatory backdrop that every deal is now conducted against. That is both in the form of antitrust control, but also growing foreign investment control regimes and their growing jurisdictional scope. More and more countries have their own sets of rules and for those countries that have them, the scope is very much expanding and financial thresholds are dropping.
Ansarada: I guess the main question is what will derail the train, so to speak. From talking to people in the industry, it would need to be something quite large.
Rhys Evans: I agree. As someone involved in the industry, you never want to be blasé about how long the boom will continue. But if that event does occur at some point, I think there’s going to have to be something relatively severe for that, as you say, train to be derailed. Whether that will be monetary policy or regulatory changes or some other unknown factor remains to be seen.