Key takeaways
- The twin risks of inflation and rising interest rates should affect deal values, but the high level of competition in the market due to record levels of available capital continues to keep deal valuations high.
- Carve-out transactions continue to be popular, but funds are also increasingly expanding into other strategies like long-term hold, sponsored SPACs and minority stake transactions.
Interest rates and valuation
Rising interest rates should, in theory, dampen valuations because buyers will have a higher cost of capital. The higher equity mix and the higher cost of debt could challenge private equity valuations. However, there is still a lot of competition in the market, which so far shows no sign of letting up, so valuations do not currently look likely to come down. As an added effect of the competition in the market, PE firms have become more selective about the deals they are pursuing.
Latest development on representation and warranty insurance
There are buyers taking out RWI and nothing else, with limited exceptions. With prices high, underwriters broadening exclusion lists, and a general lack of appetite by insurers, a few private equity funds have chosen to forego RWI policies, even in the walkaway deal setting, essentially self-insuring the deals.
Deal activity in 2022
Carve-out transactions continue with the expectation of more on the horizon as strategics restructure to focus on core businesses or move into higher-margin areas and new markets. Fund managers are also diversifying into new strategies like long-term hold platforms, SPACs and GP-led secondaries, where managers seek additional time for promising assets. Minority transactions, including partnerships between private equity and public companies, are also upswing.
Geopolitical challenges impact on cross-border deal-flow
The effects of geopolitical developments are now among the first questions raised across all jurisdictions, from sanctions to regulatory regimes. In many multi-jurisdictional deals, clients are often surprised by the regimes that now exist to scrutinize foreign direct investment in many sectors.
Operating in high-inflation environment
The operations of business and their underlying valuations are impacted by inflation and fund managers are trying to understand which sectors will be hit the hardest. Sponsors will need to carefully monitor the situation - if you can get a sense for how inflation will go, you can price it into transactions.
Download the full PEI Keynote interview article with Michael Fieweger and Darcy Down here.
