Merger and Acquisition (M&A) Trends - Minority Investments, LBOs, Go-Private, PE, and Complexity

As we prepare for the year 2023, the mergers and acquisitions (M&A) landscape is poised to be shaped by a confluence of variables unlike any we've seen in recent memory.

The current state of the economy, coupled with a host of geopolitical and regulatory pressures, is expected to lead to some significant shifts in how companies approach M&A in the year ahead.

One of the most notable changes in 2023 is an increase in minority equity investments.

With inflation at record levels and interest rates on the rise, many companies may look to avoid taking on debt by soliciting minority equity investments instead. This move is likely to be particularly appealing to private investors, including private equity firms and institutional investors, who are currently sitting on ample amounts of "dry powder" and looking for opportunities to put it to work.

While minority equity investments may rise, leveraged buyouts (LBOs) are expected to remain relatively low.

Uncertainty surrounding interest rates and the timing of recent rate hikes will likely make lenders more cautious, and many banks have already tightened their lending standards. This shift may open the door for alternative debt providers, such as private equity groups with private credit funds, to step in and fill the void left by traditional lenders.

Another area where we see a significant change in 2023 is in go-private transactions.

With stock prices currently depressed, companies may be more inclined to take themselves privately to avoid the scrutiny and volatility of the public markets. Hard assets such as REITs and infrastructure, particularly those with environmental, social, and governance (ESG) attributes, may prove attractive targets for this type of transaction.

Private equity exits are also expected to become more complex in 2023.

With public markets struggling, private equity firms may look to diversify their exit strategies, leading to an increase in sponsor-to-sponsor sales, GP-led secondaries, and continuation funds. This increased complexity may also lead to increased scrutiny from limited partners, who may push for greater oversight rights in their investments.

Overall, the year 2023 is shaping up to be challenging and uncertain for M&A.

Companies will need to navigate a complex and rapidly changing landscape and may need to be more creative and flexible in their approach to M&A to succeed. As the market evolves, we expect new opportunities for bespoke legal arrangements and creative lawyering.