Dealmaking confidence returns to Europe in 2024 after a subdued 2023

Dealmaking in Europe turned a corner in Q4 of 2023 and in the early months of this year, as pipelines in private equity, M&A, venture capital and equity capital markets all began to improve thanks to recovering economic conditions across the continent.

Osborne Clarke has prepared a report in which we have analysed the trends emerging from a legal perspective in European dealmaking in 2023 and look at how they are likely to pan out in 2024.

Key findings from the report include the following:

2023 look-back

2023 was a challenging transactional market which favoured buyers and investors more than sellers, companies and founders. In Europe the total value of deals fell across the board.

On the whole, our predictions for M&A dealmaking (in the UK specifically and Europe as whole in 2023) were realised.

Private equity suffered a particularly slow year and leveraged buy-outs were hard hit by high interest rates and lack of access to financing on acceptable terms.  Many sponsors decided to keep their powder dry and wait until the market improved or turn their focus to smaller less risky bolt-on acquisitions.

Equity capital markets saw a strong drop in IPOs, though there was some resilience in follow-on issuances and public-to-private transactions.

Venture capital endured one of the toughest periods in several years, with funding declining particularly for later stage businesses looking for larger investments.

Activity was subdued by the relatively weak economic picture across the continent, which reflected global economic and geopolitical uncertainty, rising inflation and interest rates, supply chain, climate and energy security risks, and increased state protectionism and regulatory scrutiny.

However, despite the general market conditions, Osborne Clarke's practice grew 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 three 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.

Trends in 2023

The prevailing conditions had the following impacts on dealmaking in Europe in 2023:

Acquisition finance

Financing deals became more challenging. Interest rates were higher for borrowers and lenders imposed tougher conditions and were reluctant to lend larger sums. Private credit filled the gap where lenders reduced access.

Pricing

Valuations were difficult to ascertain and buyers took a cautious approach. While some realism returned after the aggressive valuations of preceding years, there continued to be a mismatch of pricing expectations between sellers and buyers and companies and founders, affecting deal deliverability and deal structuring.

Investors wanted to see a strong financial track record before a company launched an IPO. Completion accounts came back into favour for acquisitions to validate valuations.

Deal deliverability and risk appetite

Uncertainty meant deal parties were all risk averse as regards deal negotiations. Some deals failed to get off the ground entirely, others remained in the early planning stages for longer, and a larger number than usual of deals aborted or went on hold pending renegotiation.

Due diligence exercises were thorough, with a hawkish approach taken to negative findings. Challenging access to financing and risk aversion led to deals being smaller on average. Parties sought security for payments in the face of credit risk.

Deal processes are digitalising at a fast pace, and in 2023 we saw an increased use in Europe of digital signing platforms, artificial intelligence (AI) for translation, document review and reporting tools, and cloud collaboration and project management tools, which could be used to reduce cost and risk.

The  growing reliance on warranty and indemnity insurance helped to mitigate risks for the parties, with more deals than before being executed on nil recourse terms.

Certain areas came ever more into focus for due diligence and warranties, including foreign direct investment, ESG, AI, data and cybersecurity.

Regulation

Regulation and enforcement of regulation continued to increase to protect national interests in light of ongoing global threats. New foreign direct investment control regimes were adopted in some EU Member States, and other European countries tightened or clarified the scope of their schemes. This resulted in more non-simultaneous exchange and closings, and protracted negotiations.

The EU brought into force the Foreign Subsidies Regulation which also began to impact deal timetables for larger transactions where the target or the acquirer had received funding from a foreign state.

Across Europe we saw wider increased regulatory enforcement, including in the life sciences and healthcare sector.  

Carve-out transactions and distressed sales

Carve-out transactions were popular as a way of offloading non-core assets, streamlining or deleveraging group balance sheets. There was also, unsurprisingly in the difficult trading conditions, an increase in distressed sales.

Transformative deals

The need to transform businesses to keep pace with the rate of change in the world, led to necessary M&A transactions in the digitalisation and decarbonisation spaces.

Vertical acquisitions were entered into to ensure supply chain security. Organic growth is ever more testing as the business environment becomes increasingly international and complex; accordingly, many businesses chose to enter into an acquisition in 2023 to purchase scale, geographic reach, personnel or resources.

Dealmaking in 2024 – Osborne Clarke's view

Some signs of improvement were seen in the transactional market in Europe in Q4 of 2023 and into the first months of this year. This improvement is dependent on global geopolitical and economic conditions, which remain uncertain and potentially volatile. Nevertheless, it is anticipated to continue through this year, as interest rates fall across the continent and growth rates improve, bringing more stability and  fostering more positive market confidence.

The recovery is first being seen in M&A, private equity and venture capital, with a lag expected for IPOs.

The tendency towards protectionism in trade and investment and measures to shore up national security will continue.

Borrowing will remain somewhat challenging, though will ease as interest rates fall further.

Buyers can be expected to continue to be cautious in the first half of the year, though more seller-friendly terms and processes such as strong valuations, auction sales, cash on completion and locked boxes are likely to return in the second half.

There are plenty of investors and acquirers that have built up large cash reserves and are now ready to recommence their programmes of acquisitions and investments.

Trends and opportunities for growth in 2024

We expect several of the trends observed in 2023 to continue through 2024. We expect the following additional trends this year:

• Joint ventures will become more popular as a way of mitigating the risk of operating a business alone in today's complex world.
• Partial or tranched sales may enable exit routes otherwise unavailable.
• Consolidation deals. Europe has many fragmented sectors ripe for consolidation, as strength in scale will be important to face the challenges of 2024.
• Businesses that have struggled to grow organically in this testing economic environment or where trading has exhausted management will be marketed for sale.
• Larger private equity or venture capital-backed companies seeking a listing.
• Convertible bonds being a popular investment type, allowing companies to borrow relatively cheaply without immediate equity dilution.

Key sectors to watch this year

The sectors we anticipate will account for a large portion of transactions in 2024 include:

• Technology, media and communications, including AI, software, cloud and robotics, climatetech, fintech and healthtech.
• Renewables and decarbonisation.
• Life sciences and healthcare.
• Financial services.

View the report