2023 review
Market trends
Dealmaking was subdued in 2023 in Europe, due to the relatively weak economic picture across the continent. On the whole, our predictions for M&A dealmaking in the UK specifically and Europe as whole in 2023, were realised.
However, despite the general market conditions, Osborne Clarke's practice has grown relative to market growth, with our sector focus supporting our outperformance of the market. We saw 294 European transactions complete, of which approximately 30% were cross-border, with 17 involving more than 3 jurisdictions. This represented almost a 15% increase on the number of deals completed and a 17% increase in cross-border deals, showing that deal flow held up despite the weaker economic conditions, though it is likely that on average those deals were slightly smaller by value than those in 2022.
M&A and Private Equity
As reported by Reuters (Dealmakers see rebound after global M&A volumes hit decade-low, 21 December 2023), globally, the total value of M&A deals fell by approximately 18% to their lowest levels since 2013, with a larger decrease of about 32% in Europe by comparison to 2022. The number of deals fell by a slightly lower percentage as there was some resilience in smaller deals.
The tech sector remained resilient as AI and other new technologies created a spurt in dealmaking.
Private equity buy-out volumes declined by 38% globally. Boston Consulting Group reported that the proportion of European M&A deals involving private equity fell from 39% in 2021 to 36% in the first half of 2023; a steeper decline than the global average (Boston Consulting Group: The Regional Perspective: 2023 M&A Report, 26 October 2023). Instead, professional investors focussed more on bolt-on acquisitions by their existing portfolio companies.
Leveraged buy-outs were difficult, dropping to their lowest levels since 2018. Deals were restructured to rely less on traditional debt sources, and more on additional equity funding, increased rollover investments made by sellers and private credit financing.
Venture capital
The Q3 2023 European Venture Report, 18 October 2023 published by Pitchbook noted that deal value within VC markets was set to end in 2023 well below 2022. According to the report, venture capital deal value in Europe amounted to €43.6bn in the first nine months of the year, representing a decrease of 49% on the equivalent period in 2022. Late-stage investments showed greater declines versus early-stage ones.
These statistics reflect our experience that fewer VCs were active in the market, reducing competition for investments and access to suitable investment syndicate partners, and leading to existing investors being asked to invest instead. This lack of competition resulted in lower valuations and smaller round sizes with less risk.
Term sheets also became more investor friendly, incorporating full dilution ratchets, participating liquidation preferences, slightly higher multiples used for the preference, more aggressive pre-emption and exit rights and more governance oversight provisions.
There was an increase in down rounds and rescue rounds which brought challenging structuring, insolvency and company law considerations. Some follow-on rounds or rescue rounds used tranching where an existing investor wanted to ensure milestones were met before making any further investment.
Convertible instruments were increasingly used as a bridge between financing rounds, and for companies in distress, sometimes with aggressive terms such as a significant conversion discount. We have also seen the use of SAFE agreements (simple agreement for future equity).
Equity capital markets
PWC noted that for the second year in a row, the European IPO market remained quiet with IPO proceeds raised in 2023 falling to €10.2bn, a drop of 35% compared to 2022 and the lowest level in over 10 years since 2012 (€8.7bn) (PWC: IPO Watch Europe Annual Review 2023, January 2024).
Some potential issuers held off listing as the valuation was too low, others due to the concern they would replicate the same poor aftermarket performance and stock price volatility of some companies that listed in the challenging trading climate of 2022. Some businesses were deterred from incurring the larger financial burden that comes with being a listed entity, while other business costs were increasing.
While the number of IPOs was down significantly compared to the previous 12 months, secondary/follow-on equity issuances showed strong resilience, with proceeds increasing in 2023. There were also a number of European public-to-private deals due to low stock market valuations.
The strongest sectors for IPO activity globally were IT, healthcare and finance.
Recovery began in Q4 2023
After the slump, there were signs of recovery in Q4 of 2023. There was more deal flow (as inflation eased, interest rates peaked and economies stabilised) and management teams began adapting to the new normal for deals – wider valuation gaps, more regulation and more challenging funding.