Value bridging and risk-mitigation
PE buyers may start to rethink valuation metrics in response to higher costs of capital and challenges in marking existing investments to weaker public market benchmarks. Expect to see more deal structures and integration strategies that mitigate risk, including more earn-outs and partial/minority deals.
More lower-mid market deals
The financial metrics for mega-deals have changed as another consequence of the rising cost of borrowing. The lower-mid market is likely to be the key battle ground where M&A activity is most resilient with transactions more likely to be funded by equity than relying on new lines of debt.
A rise in buy and builds
More risk-averse equity houses will feel more comfortable backing existing platforms rather than starting afresh with new management teams. The higher cost of capital will raise the bar for new platform investments.
AI goes mainstream
The buzz surrounding the release of natural language chatbot, ChatGPT, has significantly raised the profile of AI. The USD 29 billion valuation of its creator, OpenAI, is fanning the flames. Venture Capital-led UK AI deals in Q4 included V7 Lab’s £27 million Series A fundraising and Applied AI Company’s £35 million seed round. AI deals may soon become the domain of mainstream buyers as broad-based technology businesses aim to bolster their capabilities.
Talent management
As firms grapple with ‘the big quit’ and work-from-home dynamics, there's been a rise in demand for software that manages employee acquisition; aids retention and employee wellbeing; manages benefits; and delivers training and efficiency in HR processes.
Cyber security
In a world increasingly dependent on data and cloud computing, cyber security remain as hot an area as ever. We expect consolidation in this space, driven by demand for end-to-end Zero Trust (cybersecurity that spans an organisation’s entire infrastructure). There's strong momentum in the Microsoft partner ecosystem with the deployment and support of its Sentinel system.
ESG driving deals
Ideagen acquired ProcessMAP in October to build on its expertise in supplying software solutions for regulated companies. We expect technology deal opportunities to continue to see acceleration in the environmental, social, and governance (ESG) market as regulatory compliance remains key, and reporting and supporting ESG performance moves into the mainstream.