Deals - Market volatility and higher cost of debt will impact M&A activity

13 February 2023

Australia’s M&A market and deal volumes were impacted by economic uncertainty throughout 2022, particularly in the latter part of the year. In addition to the IPO window closing, we saw first-hand the effects of enhanced buyer discipline and due diligence coupled with the increasing cost of debt. Such themes will result in a continued decline in overall activity in 2023.

Despite major headwinds that will challenge activity, we are already seeing some green shoots. Many financial sponsors and cash-rich businesses are looking to take advantage of depressed valuations, where distressed and struggling businesses present a significant upside opportunity. As market volatility impacts larger institutional deals, we predict strong activity in the mid-market. Strategic buyers, local and offshore private equity funds, and growing direct investors from superannuation funds, will be seeking to deploy capital.

We expect financial sponsors to approach the new year with caution, assessing the impacts of macro-economic changes and rising interest rates. Investors still have significant stores of dry powder which should buoy mid-market activity, and there is an expectation that fiscal tightening will ease towards the middle of the year. Given the significant valuations of recent times, financial sponsors will focus on improving the performance of their portfolio assets to ensure exit readiness when activity returns and valuations once again increase.

Social and environmental issues will remain at the forefront of board discussions, with businesses facing mounting pressure to meet net zero targets and commit to energy transition plans. Accordingly, ESG will have an increasing influence on M&A activity as cleaner energy investment continues to increase. In the Asia Pacific region, renewable energy deal activity is already picking up considerable steam.

Australia continues to be an attractive market for offshore investors. It is relatively sheltered but not entirely immune from global economic forces. In 2023, while we expect overall M&A activity to decline further from early 2022 levels, M&A will remain a key strategy for businesses to reach their growth targets.