Low cost of capital and asset competition will drive M&A
Coming off more than $300 billion of transactions in the Australian market, high levels of M&A activity are predicted to continue in 2022.
Despite the prospect of increasing interest rates, the overall cost of capital will likely remain low, and we expect most buyers have been factoring in at least modest increases to their investment decisions. There continues to be substantial competition for assets too, which is likely to increase as Australia’s pool of capitalised investors increases for two main reasons. Firstly, larger superannuation and infrastructure funds are now focusing on direct investments. Secondly, Australia remains a relatively high growth market and is seen as attractive for inbound and global investors across key industries such as healthcare and financial services.
Environment, Social and Governance (ESG) criteria is also becoming a material factor in assessing transactions. As social and environmental expectations grow in the eyes of consumers and businesses build or maintain their reputations, ESG considerations will factor more heavily in due diligence. For the industry at large, scrutiny of ESG aspects will increase even further this year, with large industry and retail superannuation funds making more direct investments.
Globally, demand for Australia’s resources has helped the economy to continue to thrive in many respects. Significant global trade events may have a genuine and prompt impact on M&A activity closer to home. Meanwhile, although we do not expect the looming election to have a material impact to the majority of M&A activity in the mid-market, changes may affect policy-dependent industries or industries exposed to large Government sector clients. At the big end of town, appetite to invest may wane during an election campaign due to potential uncertainty and increased scrutiny regarding Foreign Investment Review Board approvals.
This year’s hot market will result in underprepared businesses coming to the fore. Buyers and investors will need to be diligent in unpacking the ‘noise’ from ongoing COVID-19 related trading disruptions. Before entering transactions, we encourage buyers to perform rigorous analyses to assess sustainable earnings, the viability of changes to business models and associated changes in working capital. This will require investors to trust their management teams and investment theses more than ever.