Private equity is one of the main driving forces behind the global and Irish mergers and acquisitions (M&A) markets. And it has more cash at its disposal than ever. According to leading financial sector research company Preqin Pro, the private equity industry had cash reserves of $1.96 trillion (€1.83 trillion) available for investment as 2022 drew to a close. That was a 21 per cent increase on the December 2021 figure and it represents good news for Ireland.
“Last year we witnessed a large and growing interest in Ireland as an attractive jurisdiction for private equity,” says Eversheds Sutherland partner Gavin O’Flaherty. “This is being driven by the growing success and scale of many Irish domestic companies, which are now of a size to attract private equity interest, either directly or, for smaller companies, as ‘bolt-ons’ to portfolio companies.”
Focus Capital Partners managing director (M&A) Alan Kelly believes private equity will remain active in the Irish market in the coming year.
Private equity firms “have raised so much capital they have to put it to work”, Kelly says.
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“There has been a lot of overseas private equity interest in the Irish market,” he says. “They see it almost as a new market. They weren’t very active here even four or five years ago. There is probably slightly less competition in the Irish market than in the UK or other larger markets. It’s English speaking and in the Eurozone so that makes it attractive.”
The nature of the private equity firms looking at Ireland is also changing.
The energy sector is particularly vibrant in light of the emerging issues around consumption and the energy crisis
— Gavin O’Flaherty, Eversheds Sutherland
“We are seeing a lot more interest in Ireland from mid-market private equity,” says Deborah Kelly, head of Addleshaw Goddard’s corporate department. “Those without a presence previously are coming in and others are increasing their activity.”
Among those more recent entrants is Dutch firm Waterland, which plans to at least double the €100 million it has invested in Irish companies since entering the market three years ago. Waterland recently completed a €4 billion fundraising supported by the Irish Strategic Investment Fund (ISIF) to target medium-sized companies across Europe. ISIF invested.
Kelly also notes the launch of the AIB Foresight SME Impact Fund to support sustainable investment in small and medium enterprises in Ireland. AIB is providing a cornerstone €30 million investment to the fund that will be managed by private equity firm Foresight, which opened its first Irish office last September.
“We still see private equity as a major player in the Irish M&A market,” says Deloitte M&A advisory team partner Jan Fitzell. “It’s not going away. They have raised capital and it has to be deployed if they are to continue to acquire and recycle their portfolios.”
Energy fuels activity
It should come as no surprise that energy will be among the dominant themes in global M&A during 2023. Skyrocketing prices coupled with the growing momentum behind the decarbonisation agenda will make energy companies among the most sought-after investments in the coming years.
“The energy sector is particularly vibrant in light of the emerging issues around consumption and the energy crisis,” says O’Flaherty. “We are seeing an increase in demand for alternative and renewable energy sources and we have worked with several providers on energy financing projects, particularly renewables.
“This has also led to increased levels of work for our clients across ESG [environment, social and governance], which is why we now have an entire division dedicated to ESG with expert knowledge of sustainability regulations, rules and guidance being introduced around the world, and we have recruited a sustainability administrator to work with our ESG group to be at the forefront of the market and to reduce our firm’s emissions.”
Shareholder activism
Rising energy costs isn’t the only issue likely to drive ESG investment activity. Growing awareness of the need to reduce emissions to avert the looming climate catastrophe as well as social concerns such as child labour and modern slavery are having a profound impact on investor sentiment.
“Shareholder activism, increasingly around ESG-related themes, will continue to play a role in the M&A market,” says Peter Bennett, head of technology investment banking at Davy.
The consumer voice is influencing ESG investment as well, says Deborah Kelly.
“The generation coming up are voting with their wallets and saying they are not happy. We are seeing that in the retail sector,” she says.
Consolidation continues apace
Consolidation has been a feature of the Irish M&A market for some years, with larger firms in sectors and private equity houses seeking to gain from synergies and efficiencies by addressing fragmentation in industries.
“Healthcare has been very buoyant for this activity over the past few years,” says Grant Thornton head of corporate finance Paddy Dillon. “We are continuing to see consolidation happening in nursing homes, primary care centres, and specialist care centres.”
“Veterinary and dental practices are also consolidating, as are legal practices,” says Kelly.
“We expect to see further activity in sectors such as the insurance brokerage sector, albeit we are maybe somewhat close to the top of the wave of activity there,” says O’Flaherty. “Within the regulated sectors there should be continued activity around wealth management as well as corporate services companies. There could also be some aggregation in the hotel and leisure industry. Additionally, some of the aggregators themselves, whether in the regulated-sector environment or the healthcare sector, may look to sell.”
Consolidation is continuing in the IT managed services sector, says Alan Kelly.
“We are seeing significant interest in European managed service providers from US buyers. A lot of Irish companies provide those services and US companies are looking at them,” he says.
Tech still top dog despite turbulence
While the headlines may have been dominated by the woes of the tech sector as companies shed jobs to cut costs and stem losses, the appetite for M&A in the sector remains strong.
“There is continued interest in technology as the world digitises,” says Peter Bennett. “Increasingly both tech companies and non-tech companies will need to look at smaller innovation leaders as a source of future growth.”
Bennett points out that technology was the most active sector for M&A globally during 2022 in value terms, posting $720 billion worth of deals during the year.
“Technology will continue to be a major contributor to M&A over 2023 as it is one of the key sources of innovation in the world we live in today,” he says. “That said, the industry is experiencing a reset, as evidenced by the recent downsizing announcements by some of the larger tech firms. This will continue until these companies are calibrated towards a lower-growth environment compared to 2021. This may dampen some firms’ desire to pursue M&A but I expect this to be outweighed by an overall trend towards consolidation and inorganic growth in the market.”
Activity may also be spurred by the sell side.
“With a possible slowdown in investments in the tech industry, there may be an increase in M&A activity in that sector as companies explore different forms of funding, or where, for example, late-stage and high-interest investors press for an exit event,” says O’Flaherty.
And there are certain hotspots within the sector.
“We are increasingly hearing about cybersecurity – it affects everybody,” says Deborah Kelly. “If a company has software solutions in that space it is going to be attractive to buyers. Data processing is another huge area. Edtech was big last year as well. Any companies within that space will be attractive.”
The two i’s
Inflation and interest rates will weigh heavily on dealmakers’ minds during 2023.
“If the current level of inflation persists, we are likely to see more negotiations on deal price and increasing emphasis on alternative consideration structures as the margins businesses can achieve, and projections for future profitability, are impacted,” says William Fry corporate partner Elaine Morrissey.
“We may also begin to see longer exclusivity periods being sought by buyers, allowing for a more stringent due diligence process and greater insight into the operational side of the business before a deal is signed,” she says.
There are more than two sides to this particular coin, Bennett says.
“As we saw during 2022, central banks have shown strong conviction in reducing the pace of inflation growth via a high cadence of historically large interest rate rises,” he says.
“If inflation growth continues to persist in 2023, central banks have been vocal in their stance of continuing to push through interest rate rises. With this the cost of capital will generally go up and corporate valuation levels generally fall. Typically, these conditions depress M&A activity but also provide an opportune time to acquire for the stronger, larger and better-capitalised acquirers.”
Getting creative with deal structures
Sellers and buyers are likely to turn to more creative deal structures as they seek to mitigate some of the challenges to deal completion.
“We envisage that deal terms will increasingly focus on giving buyers more security in an uncertain climate – deferred and earn-out consideration elements instead of the entire consideration being paid upfront, partial acquisitions with put and call option arrangements to acquire the remaining interest and, instead of the entire consideration being paid in cash, shares in the buyer entity forming part or all of the consideration package – each intended to mitigate the buyer’s risk,” says Morrissey.
“Reliance on management incentivisation and retention plans will continue to be commonplace,” she says. “We may also see a revised allocation of buyer risk through a wider range of ownership structures such as joint ventures, formal partnerships or strategic alliances, rather than traditional acquisitions of the entire business.”