Pilar Tarry

Can you give a broad overview of where the global M&A market sits at the moment? How do you expect this to develop over the coming year?

It is certainly going to be interesting to watch how global dealmaking unfolds over the coming year. I don’t have a crystal ball – I wish I did. But I think people naturally want to compare activity with 2021, when we saw unprecedented levels of dealmaking. While the volume of deals is certainly down compared to that record year, we are still operating in a very strong global deal market. We have seen in both Europe and the US that the first half of the year was quite active as dealmakers worked through a healthy pipeline of deals. In a lot of ways, activity in the second half of the year is really going to provide the baseline going forward. I do believe that transaction volume will remain stable, but the way in which deal opportunities come to market will look a little different over the course of the next year.

Since the beginning of the COVID-19 pandemic, there’s been a general expectation that we will see more distressed and turnaround situations. However, a major uptick in activity has yet to materialize. Do you expect to see an increase in this type of transaction?

The short answer is yes. It’s now not a case of “if” we will see more deals connected with restructuring, but “when”. People tend to equate restructurings with bankruptcies, and that’s not necessarily the same thing. While a bankruptcy is typically a restructuring, there are many restructuring and distressed type transactions or situations that are only considered part of a complex or distressed universe in retrospect. In this sense, activity has been happening already, but we are expecting an uptick. In fact, we surveyed about 600 turnaround experts this year, and 76% said they believe M&A transactions involving distressed assets will increase. I expect to see activity in the automotive, manufacturing, and retail industries, which are being particularly disrupted by supply chain vulnerabilities exposed during the pandemic – this will drive a fair amount of deals. The need to diversify and ensure that businesses have supply chain alternatives through nearshoring is driving a number of transactions, especially in manufacturing, as businesses want to be protected in the event of further disruption.

The other major trend set to affect complex transactions is the financing environment and the state of the capital markets. While deal financing is still available, especially from private lenders, it is much more expensive. This has made the pricing on deals very high, and I think the pressure is going to pile on for companies finding themselves on the borderline of distress. The expense of financing, and the difficulty of sourcing, is going to tip more companies into distress as we move forward. 

Do you think the increased expense in financing might affect the way that deals are structured going forward?

I think we will start to see this play out within the private equity market in particular. PE firms clearly have a lot of dry powder and are keen to deploy it – they will still be chasing deals. Yet PE relies heavily on high-yield market financing – large, syndicated deals – and that market has been extremely quiet lately. Capital markets do tend to move at lightning speed, however, so we could see that shift quickly.

What we might see is a focus on deals that are better candidates for private lending, because this market is still active. It’s expensive, however, and rising interest rates will make it even more so. While there is still financing available, its rising cost will start to have an impact on deal structures. I think that we will start to see PE firms trying to fill the gap with equity, meaning that equity as a percentage of overall deal value will increase. That’s how they’ll try to bridge some of that gap. 

You say that PE firms are under pressure to deploy dry powder, yet the financing environment is challenging. What do you see as the main qualities PE firms need to show to prosper in this environment?

I think we’re going to see private equity firms become very active, but they’re going to be very selective as there are not enough quality assets to go around. I think PE is very adept at navigating those situations. Firms that do well are going to be the ones who can spot a deal, make a decision, move very quickly, and be smart about how to start extracting value from the deal so they can realize the returns. The ones who move quickly and create more value from synergies are the ones that will really shine. This might mean that the deal timeline gets protracted because they need to spend time figuring out what their game plan is, as well as raising the financing. Good, insightful due diligence is going to be even more important within this context – operational, financial, IT – all of it focused on value capture. 

In addition to financing, regulatory reviews are certainly stretching deal timelines. We are seeing clients manage this challenge in different ways. As a partner to PE sponsors, it’s been challenging, and very interesting, trying to help them navigate today’s uncertain landscape. 

And what challenges do you expect corporate buyers to face over the coming year? How do you see these differ from PE firms?

Some of the challenges are the same. But on the corporate side, there’s a real distinction between the haves and the have nots. There are a number of companies who are over-leveraged and struggling in this inflationary and interest rate environment – almost running on fumes. Despite the best intentions, they really don’t have an ability or the wherewithal to participate in an M&A strategy right now, other than to potentially divest. There are also corporates that have been able to keep their balance sheets healthy through the pandemic and disruption and are ready to transact. We’re going to see these corporates using M&A proactively to shed non-performing parts of their portfolio, and grow strategically. In an environment where a recession seems highly possible and there’s more pressure on cost, I think that, across the board, companies even in high-growth sectors such as tech, are thinking about cost and are worried about the profitability of their revenue stream.