The past turbulent year truly tested our resolve with inflation, fears of a recession, and the conflict in Ukraine all contributing to a murky economic outlook. These factors continue to dim forecasts for a recovery; yet, there are signs that the worst might have passed and that a slow but sure revival is ahead of us.
Word of the Year: Inflation
Inflation and high interest rates upended markets across the globe in 2022. While the first January trading session of 2022 looked like just another green day in a continuous stock rally, it eventually turned out to be the end of a market that, for over a decade, had gone mostly in one direction: up. Days later, the first signs emerged to show that policymakers were very worried about inflation. Investors were not thrilled by the prospects of the need to raise interest rates to curb inflation, setting the stage for the ensuing sell-off that would mark the rest of the year. Central banks across advanced and emerging economies alike entered a synchronized monetary policy cycle and steadily raised interest rates to alleviate the worst price pressures in decades, thus jarring financial markets.
Russia’s invasion of Ukraine followed, driving better-than-expected growth prospects further away and pushing investor sentiment into uncertain territory. The economic spill-overs from the war are taking a rising toll on Europe’s economies. International Monetary Fund (IMF) forecasts show Europe’s advanced economies will grow by just 0.6% next year, while Emerging Europe (excluding Turkiye, Belarus, Russia, and Ukraine) will expand by 1.7%. These numbers are down from July’s predictions of 1.3% and 2.8%, respectively.
Croatia, Poland, and Romania are among the countries expected to enter technical recessions and Europe’s output and income is anticipated at nearly EUR 500 bn lower compared to the IMF’s pre-war forecasts—testament to the region’s severe economic losses as a result of the war. Economists expect inflation to decline next year, but projections show that it will remain well above central bank objectives at about 12% in Emerging Europe.
M&A: 2022 in the rear view
Merger and acquisition (M&A) activity in the region kept a steady pace in 2022, with 1,229 transactions, up 5.6% from 2021, according to EMIS data. Deal value, however, fell short of reaching 2021’s records, coming in at EUR 32.9bn, and plummeting 20.3% on the year. The three biggest industries by value of deals on record included Mining, Real Estate & Construction, and Energy & Utilities, and even with macroeconomic headwinds, there were three deals worth over EUR 1 bn announced in 2022. The EUR 8bn merger between Poland’s PKN Orlen and PGNiG was the largest deal in 2022.
In the private equity realm, deal makers stayed busy but lost their appetite for big-ticket transactions as the rising cost of debt eroded prospects for generating returns through leveraged financing. Two hundred and eighty-nine deals – 3.2% more than in 2021 – took place in 2022, with an aggregate deal value of almost EUR 10bn, down 23.4% year-on-year. The sale of Polish electricity PKP Energetyka by Luxembourg-based CVC Capital Partners to state-controlled utility PGE stood out as the biggest transaction valued at EUR 1.3bn.
Market debuts suffered the most from the overall economic backdrop. EMIS data for 2022 shows only thirteen initial public offerings (IPOs) with an aggregate value of just EUR 41.5m took place last year. This subdued activity compares to 2021’s 60 market debuts totalling EUR 8.6bn and indicates just how reluctant companies are to sell shares at a low price, preferring to stay on the side-lines, awaiting a recovery.
The Year Ahead: Rocky Days in the Short-Term, Positivity in the Long-Run
And while higher acquisition financing costs will continue to dent M&A transactions going into 2023, we are predicting a slow path to recovery due to a few important factors. Private equity and venture capital firms are said to be sitting on EUR 1.23 trn and EUR 547bn of dry powder, respectively, which is yet to be put to work.
While investor confidence and sentiment have been subdued, executives believe a downturn will ultimately spur M&A, according to a survey of more than 200 dealmakers. Stockpiled funds, distressed and turnaround opportunities, as well as lower valuations have historically been a boon for bootstrapped investors and there is no reason to believe 2023 will be any different. Despite the macro environment, M&A will remain an important part of corporates’ long-term business strategies.
Another reason to believe it will be “business as usual” for European deal makers is the historic milestone for a Balkan nation, namely Croatia joining the Eurozone and Schengen area, thus significantly bolstering confidence in the stability of the region.
From a macro perspective, inflation remains the elephant in the room. All in all, inflation is expected to remain higher for longer but as the outlook for Europe continues to improve, there is hope that it will steadily decline through 2023. On top of pure macro drivers, it is likely that the new year will be far less unsettled than 2022 unless a major new geopolitical shock intervenes. And as for inpatient deal makers, there are already plenty of opportunities going into 2023.
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