2024 review
Key themes in transactions in 2024
From our survey responses and a general analysis of the market in our jurisdictions, we noted the following main themes in 2024.
Valuation gaps and risk appetite
In 2024, valuation gaps narrowed but still sometimes caused protracted negotiations, deal renegotiations, and aborted transactions. Earn-outs, deferred consideration and share consideration became common solutions, other than in India, where legal restrictions make this challenging, to bridge gaps in M&A and PE deals and higher percentages of consideration deferred. In other cases, deals closed with cash on completion, but at a lower price. Buyers wary of overpaying conducted deeper due diligence, sought more indemnities, and relied on warranty and indemnity insurance, though costs pressures sometimes put constraints on these.
Renegotiations were often needed for valuation gaps or pricing changes.
In India, cultural disconnects between Indian sellers and overseas buyers and investors over issues like over-confidence in the strength of the Indian market, compliance and ESG caused valuation gaps, which sellers struggled to comprehend.
With more deferred consideration structures, more escrows and other security for payments were implemented in the deal arrangements.
Completion accounts were preferred over simpler locked-box mechanisms in some jurisdictions to verify prices. Sometimes hybrid mechanisms were used with a locked box and completion accounts.
Market volatility complicated IPO pricing, while venture capital occasionally used milestones and tranched investments to align expectations.
Valuations hindered venture activity, with many deals failing to reach the term sheet stage, though early-stage companies faced fewer challenges.
In some jurisdictions, share options and incentives were difficult to deploy successfully where business valuations weren't predicted to rise much, and where tax regimes were also not beneficial.
Many exits were held up pending improved valuations.
Dry powder expended and overdue exits
Over the last few years both PE and VC funds have accumulated vast supplies of dry powder, which are ready for deployment. In 2023, many funds used a wait and see approach and fewer funds were spent than normal. With fund terms requiring deployment of capital within a set period, for many funds the need to spend the money became imperative. As a result, there was an increase in buy outs and a slight increase in venture investments, particularly into the second half of 2024.
Equally, funds have held off selling assets pending improved valuations, and deal terms. Some exits were overdue and there was strong pressure on funds to dispose of assets, this pushed them towards secondary exits, or improving the number of M&A exits (and in a few cases, IPOs) as the year progressed.
However, in 2024, there was still a strong focus on either existing portfolio companies or buy and build strategies.
Artificial intelligence
AI was a key investment for VC funds, with sustained investor interest in AI-driven innovations and related businesses such as data centres. AI managed to buck the trend of a slow venture market and areas of focus grew, such as an AI ecosystem in Flanders in Belgium. Numerous AI companies went public. AI and other new technologies also drove transformative M&A as companies sought to innovate and reinvent their business models.
AI also impacted deal processes, and together with other digital solutions transformed investment strategies, decision making and financial analysis. It has started to make material ground in the legal review of documents for due diligence and assistance with legal research, advice and drafting.
Alternative finance and private credit growth
Innovative financing structures became popular to navigate high capital costs and interest rates. The expansion of private credit offered flexible financing solutions. Non-traditional investors, family offices and corporate venture arms played significant roles in venture investments, especially, the case of the latter, in cleantech. Structures like access funds and feeder structures tapped into retail capital. Despite the traditional credit market having eased through 2024, it is expected that the newer private credit market will remain as an alternative funding source.
Vendor loans, co-investments with sovereign wealth funds and non-cash consideration were used to help cash flows and lack of bank financing.
More strategic acquirers financed transactions off their own balance sheet reserves.
Real estate M&A did not appear to be able to respond as well to the lack of traditional financing, however, and performed poorly in 2024.
Despite traditional lending starting to ease, deals remained on average smaller in 2024.
Cross-border activity
Cross-border transactions rebounded due to an improving US economy and increased available foreign investment. Near-shoring and local content activities grew, particularly in sensitive sectors or in relating to critical supplies, due to global instability and manufacturers and retailers continued to acquire suppliers or logistics companies to gain greater control of their supply chains. For example, the Indian government requires procurement in the defence sector from Indian entities owning the IP and with high local value addition, so overseas investors are entering into joint ventures with Indian counterparts to comply.
The technology sector saw growth in cross-border M&A, and in particular this was due to acquirers seeking AI targets.
Cross-border listings gained momentum, with more companies choosing to list overseas. However, some transactions involving US investors went on hold pending the outcome of the US elections.
Cross-border collaboration between tech firms and financial service providers (e.g. in fintech, cybersecurity, and AI) was achieved through corporate deals.
US buyers often required deal terms to follow a more US style (e.g. indemnification for warranties, conditions to closing, use of completion accounts).
Environmental, Social and Governance (ESG)
ESG remained a hot topic, influencing M&A strategies and investment decisions. Legislative benefits in some jurisdictions encouraged deal-making. Venture capital focused on sustainable and climate tech startups, while private equity emphasised ESG accountability and reporting transparency. Significant EU funds directed towards ESG-compliant projects made these attractive targets.
A business's D&I credentials became increasingly important and a specific area for due diligence.
The European Union's Corporate Sustainability Reporting Directive made companies think more about ESG when making deals.
ESG featured increasingly in the form of warranties in sale and purchase agreements (SPAs) and other transaction documents, though in some jurisdictions there is not yet a regulatory or statutory standard for ESG in general which can be warranted, so specific areas, instead, are warranted such as environmental matters.
In India, buyers were keen on this topic, which sometimes caused a mismatch with sellers, who prioritised this less.
Conservative investment approach
Despite cautious optimism, buyers and investors exhibited conservative tendencies. Buyer-friendly terms prevailed, with tighter conditions to safeguard investments amid market volatility. Deals often involved thorough due diligence, and effective protections against items discovered in that exercise, though cost pressures also led to some more high-level reviews with a more focussed scope. Where reviews needed to be more limited, gaps were plugged with warranties or indemnities or through deferred consideration subject to milestones or other risk sharing mechanics in the deal documentation.
Conditions precedent were added more often to deal with items discovered in due diligence, to enable buyers a get out before completion for key issues of concern, though other deals saw items being dealt with earlier, before signing to give comfort before moving ahead with detailed deal negotiations and signing. 'Hell and high water' provisions were used in connection with FDI approvals, and not just anti-trust approvals.
More deals involved specific indemnities to cover known risks and SPAs and other transaction documents saw the drafting of detailed compliance warranties, and warranties around key areas of concern such as FDI, cybersecurity and data.
Interest in warranty and indemnity (W&I) insurance continued to increase and is a go-to solution for risk adverse buyers and sellers. Specific policies were acquired for very specific identified risks.
In capital markets, conservative pricing and lock-up strategies ensured stability post-listing and secondary fundraisings were popular where a company had a profile and track record.
Investors focused on high-potential sectors like AI, healthcare, and renewable energy and high-quality assets with robust financial performance and sustainable business models. In venture capital, there has been a trend towards specialisation in fund strategy and to ensure a return on investment, private equity emphasised value creation through operational efficiencies, treasury management and talent recruitment retention. Strategic buyers were very selective, and there was much competition for outstanding targets.
Technology was used to assess and make well considered decisions about investment decisions and to respond to the challenge from deal parties to deal fees and work outputs for certain process tasks.
Distressed deals
In 2024 we saw a slight rise in distressed M&A, particularly in sectors such as Consumer and Retail, driven by insolvencies and restructuring efforts. There have also been carve out deals, where businesses sought to divest of non-core assets. However, there has still perhaps been less distressed deals than may have been expected.
Venture saw a number of rescue rounds, but also investors chose to cut their losses rather than invest further rescue funds, and venture deals have generally struggled to get off the ground at all where the target had questionable financials.
The rise of regulatory scrutiny
More jurisdictions enacted FDI control laws, making transactions potentially conditional. Sweden adopted a new FDI law at the end of 2023 that began to feature in transactions this year. Singapore also enacted new FDI rules, though these are narrow in scope and did not figure in our deals.
Parties sought early clearance to complete deals unconditionally. Regulatory scrutiny impacted M&A and smaller venture deals.
A number of jurisdictions have FDI laws where the scope is currently not fully clear which added to deal timetables; this will only improve over time as more guidance is issued and more deals are considered.
Parties avoided large transactions to evade regulators.
India struggled with merger clearances, with the timetable for scrutiny becoming extremely long. The government has now resolved to improve this, and timetables are slowly reducing. Regulatory scrutiny of companies with links to countries which share a land border with India and specifically China scuppered some deals. Another element in India stretching out timelines has been the new law to require all shares to be dematerialised.
Certain sectors were more heavily regulated, and this impacted compliance considerations, due diligence and other approvals that were needed to ensure a deal can proceed.
The EU Foreign Subsidies Regulation (FSR) did not feature markedly yet on deals Osborne Clarke advised on in 2024.
Of course, the increased complexity made deal timetables longer, and negotiations more involved.
Beginnings of resurgence of capital markets?
Q3 modestly outpaced the first two quarters in terms of the number of IPOs globally, as the equity capital markets became less volatile. As successful IPOs with strong aftermarket performance increased, so too did investor confidence, giving further companies the case for listing. Several recent deals traded above offer price, fuelling confidence.
There were a number of other reasons for the increase, including the decline in interest rates and inflation. As private equity investors sought exits for portfolio companies, IPOs regained popularity. AI companies saw sustained investor interest, contributing a number of new issuers. Investor demand was high after years of limited issuance. Several IPOs pulled in 2023 were relaunched successfully.
There were a number of IPO projects on alternative markets such as Euronext Access and AIM.
However, a number of IPO issuers waited in Q4 for the outcome of the US elections, suggesting a slow resurgence.