CMS European Private Equity Study 2023

We are pleased to share with you the 2023 edition of the CMS European Private Equity Study, a comprehensive analysis of hundreds of private equity deals CMS advised on across Europe in 2022 and 2021.

Here is a summary of the key findings:

• Deal activity remained strong until Q3 2022, but experienced a significant drop in Q4.

• New investments accounted for 85% of PE deals analysed, with fewer exits and secondary buy-outs in 2022 compared to 2021.

• Bidding processes decreased in 2022, potentially due to less involvement of PE funds on the sell-side.

• Entry into new markets was the most common deal driver (64% of deals), while digitalisation was no longer a deal driver.

• Technology, media, and telecoms (TMT) was the busiest sector, followed by Real Estate & Construction and life sciences.

• Use of MAC clauses decreased to 10% in 2022, compared to 15% in 2021.

• Fewer FDI approvals or clearances were sought in 2022 (8%) compared to 2021 (15%).

• W&I insurance played a prominent role in PE M&A transactions, increasing with deal value.

• Locked box mechanisms for setting purchase price were preferred in 80% of PE deals, while purchase price adjustments decreased.

• Earn-out provisions increased overall in 2022 but were more common in smaller deals than higher value deals.

• ESG considerations have not yet featured in legal due diligence or transaction documents.

• Management incentive schemes saw an increase, saw shorter vesting periods, increased management allocation but tightened leaver provisions.

• Overall, there were buyer-friendly developments in some deal metrics, such as the use of "tipping" baskets.

Key findings based on analysis of 2022 deals:

• New investments vs exits: 2022 saw even fewer exits compared to the year before (8% in 2022 vs 15% in 2021), indicating that the economic framework for exits has further worsened. 85% of the PE-deals analysed were new investments, whilst 7% were secondary buyouts (i.e. deals with a PE investor on both the sell and buy-side), which is significantly less than in 2021 (15%). The 2021 trend whereby a lot of deals were add-on transactions further accelerated in 2022 (52% of deals in 2022, compared to 43% of deals in 2021)

• Deal drivers: Digitalisation was no longer a deal driver, showing that many PE funds had already implemented digitalisation strategies over 2020 and 2021, but also that tech asset valuations were not as attractive.

• FDI procedures: Over the past year, fewer approvals or clearances were obtained (8%) compared to 2021 (15%).

• Purchase price adjustments: Marked preference (80%) for locked box (i.e. the purchase price is set upon signing, with no adjustments on completion). From 2021 to 2022, purchase price adjustment mechanisms decreased by roughly 6 percentage points in PE deals (whereas non-PE deals saw the use of purchase price adjustment mechanisms increase by 3 percentage points).

• Earn-outs: 12 percentage points increase in the use of earn-out provisions in 2022 compared to 2021 (37% of all PE transactions reviewed). However, earn-outs were much more often agreed in smaller deals (45%) than in higher value deals (7% in deals over EUR 100m).

• Non-compete clauses: In 2022, PE buyers exacted more stringent terms – with 38% of deals including a non-compete for longer than 30 months, whilst on trade deals only 24% of transactions had a similarly long time-period.

• Management incentive schemes: The use of vesting increased compared to 2021, though its terms have become more favourable to management in 2022– with shorter vesting periods (a time horizon between two-to-three-years having gained 17 percentage points over the four-to-five-years time range compared to 2021). On the other hand, leaver provisions were tightened – with both sweet and strip equity being taken back from bad leavers in even more cases (a 10-percentage-point increase compared to 2021).

• Sellers’ and buyers’ negotiation strength: Little movement overall in most of the other deal metrics from previous years. In some instances (e.g. increased use of “tipping” baskets rather than “excess only” baskets), we have seen buyer-friendly developments.

The full study is available by clicking on the link below. We would also be delighted to offer you greater insight into our findings, tailored to your business, by way of a presentation, conversation or a round table discussion.