Private equity (PE) demonstrated resilience and stability, despite a challenging macroeconomic environment, according to the European Private Equity Study 2024 by international law firm CMS.
The study projects a cautiously optimistic outlook for the PE market in 2024. With growing confidence in the debt markets, falling inflation and a significant investment backlog, deal activity, including exits, is expected to increase. PE investors are likely to focus on mid-market transactions, operational improvements and strategic acquisitions.
The study examined over 100 PE deals CMS advised on in 2023, highlighting significant trends and offering insights into key contractual terms, deal structures and market dynamics. The findings underscore the adaptability and strategic focus of PE investors amidst economic uncertainty.
Mark Ziekman, Partner at CMS in the Netherlands, said: "Despite a challenging market environment with high inflation and interest rates, as well as geopolitical conflicts, deal activity in the Netherlands remained fairly stable in 2023 compared to 2022. I expect that postponed portfolio company exits from 2023 will boost deal activities in the second half of 2024, especially in consumer products, life sciences and TMT."
Elmer Veenman, Partner at CMS in the Netherlands, added: "Most of the deals were once again concentrated in the TMT sector, further reinforcing our strong position in this field. Looking ahead, AI is set to make a substantial impact on the portfolio management and operational efficiency of PE funds. Additionally, the EU AI Act is establishing a robust regulatory framework that is expected to bolster investment confidence."
Key findings and insights
- Deal activity: Despite high inflation, rising interest rates and geopolitical conflicts, PE deal activity remained relatively stable in 2023 compared to 2022. The last quarter of 2023 saw a notable pickup in deal flow.
- Investment trends: New investments constituted 69% of the deals analysed, with a continued trend towards add-on acquisitions, accounting for 50% of all PE transactions. Secondary buyouts doubled, reflecting increased exit processes and auction activities.
- Sector focus: Technology, Media, and Telecoms (TMT) led the sector activity at 24%, followed by Life Sciences and Consumer Products at 15% each. The Energy & Utilities and Infrastructure & Project Finance sectors also saw significant growth.
- Purchase price mechanisms: The use of earn-out provisions declined, indicating greater confidence in valuations. The preference for locked box mechanisms continued, highlighting the importance of deal certainty for PE investors.
- ESG considerations: ESG due diligence was conducted in 47% of PE deals, up from 38% in non-PE transactions. This reflects the growing importance of ESG factors in investment decisions.
- Arbitration clauses: There was an increase in the use of arbitration clauses, with over half of the PE deals incorporating them. This highlights the preference for expert resolution, faster dispute resolution times and confidentiality.
- Foreign Direct Investment (FDI) procedures: Reflecting tighter regulatory regimes, there was a significant increase in PE deals requiring FDI approval, rising to 21% in 2023 from 8% in 2022.
- W&I insurance: Warranty & Indemnity insurance remained a key feature, particularly in larger deals. The use of W&I insurance was higher in PE deals compared to non-PE deals, emphasising the focus on risk management.
- Management incentives: The structure of management incentive schemes continued to evolve, with a rise in share options and shorter vesting periods, reflecting a more manager-friendly trend.
