King & Wood Mallesons (KWM) has released its latest annual DealTrends report on the Australian private M&A market, where investors experienced contrasting deal environments.
Recent years have shown how quickly tides can turn in the deal-making environment. Initial uncertainty generated by the COVID-19 pandemic was followed by strong deal making conditions, buoyed by favourable macro-level conditions, including low interest rates, high levels of available capital and strong industry confidence. In the final quarter of the 2022 financial year these favourable conditions began to shift.
Commenting on the findings, KWM Partner Matt Coull said, “FY22 saw conducive deal making conditions – rivers of capital and favourable availability of debt saw median deal values double to almost $100m, and the number of deals over $500m also doubled to 28%. Fast forward 6 months to end of 2022, debt is harder to come by and more expensive, so deal volumes and the pricing froth in the market has dissipated.”
While buyers in FY22 were generally willing to meet the market in terms of prices, they have been doing so on terms that have, in FY22 featured increased conditionality, including third party consents and added focus on cyber-security and data protection.
“Recent months have borne out several high-profile cyber-security breaches and data protection concerns, where consequences and visibility of breaches is high. Buyers are alert to these risks and investment committees are increasingly requiring both legal and technical diligence on these issues.
Contractual protection is also top of mind, with over half of the deals surveyed having targeted cyber security and privacy warranties. These warranties are, with the right diligence, accepted by W&I insurers and are at levels approximately double what they were 5 years ago”, said KWM Partner Matt Coull.
Further commenting on the findings KWM Partner Anthony Boogert said: "Fintech deals were hot - 11% of all KWM’s FY22 deals were in the sector…no doubt in no small part following Block’s $39 billion acquisition of Afterpay which KWM acted on, and that exuberance was reflected in the wider M&A market in the first half of FY22. Those seller-friendly conditions have moderated in the second half of 2022 and those same fintech deals are now much harder to get away” said KWM Partner Anthony Boogert.
The 2022 DealTrends Report highlights a range of other noteworthy trends such as:
- median deal value for PE deals (including bolt on transactions) was $150m, and median deal value for competitive sale processes was in excess of $500m.
- while deal values rose, deal conditionality also rose, including regulatory and third party consents, evidencing that while buyer were willing to pay higher prices, provided they obtained satisfactory terms.
- foreign investment approvals continue to feature prominently, with the ever increasing complexity of the FIRB regime requiring approval in approximately a third of all deals, a steady increase over a number of years. While some of this increase is attributable in part to higher deal values, FIRB’s new national security / critical infrastructure framework has also played a role.
- some form of deferred consideration, including earn-outs, features in almost half of all deals. Prior to COVID, deferred consideration featured in 1/3rd of all deals.
- the prominence of “asset deals” has subsided, from a COVID-influenced 23% in FY20, to 6% in FY22.
- private equity continues to remain highly active, with over half of all deals featuring a PE participant, a feature of the market that has remained resilient throughout the COVID period.
- cross border activity has remained resilient, comprising around half of all deals, with South East Asian jurisdictions beginning to feature more prominently.
You can register your interest to access the report here.
