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We are delighted to have partnered with Pinsent Masons and Howden M&A and release the 2019 edition of our report on deal terms and market themes in the M&A and private equity markets. In Pinsent Masons, Howden M&A and ourselves, we have brought together three of the most active advisers in the mid-market to provide one of the most comprehensive reviews of UK deal data available in the sector. If anybody ever quotes 'that's market' you have this report to help you!
So, what of this year's findings? 2018 continued to be one of contradictions. Despite the spectre of political uncertainty in the UK, lack of clarity over Brexit and the global threats to economic growth in the guise of trade wars and political instability, the M&A and private equity markets were as busy as ever. Good assets were highly prized and prices increased as a result, although primary buy-outs still outnumbered secondary buy-outs so we may not have reached the top quite yet. However, legal terms hardened in all but the most aggressive sell-side auctions. A good example of this two lane market is the cap on warranty claims which are either capped at 100% of the consideration or between 0-24% of the consideration and not much in between.
The tightening of legal terms came in the form of improved termination rights for buyers, be it via MAC clauses or the repetition of warranties. Gaps in valuation expectation are being bridged with the increased use of deferred consideration. The net working capital statement is becoming more common following years of locked-box use. All of these mechanisms can be used to deal with uncertainty or a lack of clarity on future performance, enabling deals to be transacted but with in-built safety valves.
W&I is becoming increasingly popular, driven by better awareness of the product, broader cover and the knowledge that claims will be met. The insurance market has increased the range of enhancements, including non-disclosure of the dataroom and due diligence reports and cover for some unlikely but known tax risks. As a result W&I is becoming a common feature on both private equity and trade transactions and provides a neat solution for investor majority sales and tax risks in particular.
For all the complexity of the legal terms, one of the most striking statistics is the disparity between the period of exclusivity granted (7 weeks) compared to the actual time taken to exchange (12 weeks). You can't fault the buyers' enthusiasm!