The U.S. mergers and acquisition market exhibited significant growth in 2021 after the pandemic and its lingering effects. Some might reason that any measurement of growth would have been an improvement from the crippling 2020 post COVID-19 economy making anything achieved illuminate with significance.
As we move through the final quarter of 2022, merger and acquisition growth has been perpetuated with private equity deals, with ESG factors being at the forefront.
Private equity deals
Private equity financing sustained significant growth from 2010 to 2020, and while negatively impacted by the pandemic, it did perpetuate a surplus of capitol to be held for later release. There was a surge of buyers bid- ding on deals. From private equity to the debt markets to finance management, buyouts were on substantially more solid footing in 2021 than in the fall of 2020.
According to pwc.com, however, inflation, increasing interest rates, governmental scrutiny and the Russian invasion of Ukraine have attempted to paralyze movement in 2022’s private equity deals. By June of this year, the market realized a 26% decline in activity.
While the future seems hopeful, some still allude to potential challenges that may become a reality. BDO, a wealth advisory service, identified difficulties at the start of the year. Supply chain headaches, rising inflation and skyrocketing interest rates loomed to derail progress. Half of CFOs at private equity-backed companies indicated a disruption in the supply chain posed elevated risk to their businesses.
With the forces of influence at hand, investors will need to exercise caution and streamline focus. The healthcare and technology industries promote stability. Lower operating costs partnered with a reliable recurrence in revenue make these avenues viable in retrospect to others.
Performing due diligence is key when trying to maximize value through deal structures. A potential management team, their investment bankers, attorneys, accountants and lenders should continue to pay close attention to the following:
• A detailed financial analysis
• Bid/offer and signing the letter of intent
• Structuring and arrangement of financing
• Negotiating the purchase agreement and closing
• Management’s equity participation
ESG influence
The intertwined concepts of ESG have established an undeniable influence over how companies operate, and it’s clear it will continue to have an influence for years to come, especially in the energy sector where ESG components can dictate whether a company gains financing for its assets. While some companies have dodged the bullet, large investor and governmental influence might stipulate ESG requirements soon.
Proving that the financial bottom line might not be the one deciding factor, companies are developing ESG protocols to decide if they will invest in specific projects. An investment that could potentially produce extensive dividends may appear to be even more attractive, for instance, if it’s not a major contributor to the global carbon footprint.
A venture that makes a viable investment in a company with a positive ESG rating could potentially experience an increase in business valuation.
The future approach to ESG will be met with skilled maneuvering. Companies will experience greater pressure in operating with- in these parameters, but profit can be rendered. An alteration in approach and investment type will drive compliance with ESG factors.
IVS Investment Banking delivers premium financial transaction services to business owners that are primarily involved in the downstream market. Our investment banking group leverages BIC Alliance’s 35 years of building connections in the industrial market, offering a wide variety of skills and experience. IVS specializes in the recapitalization and/or sale of people-intensive industrial service businesses.
