Investors showing faith in digitalization, electrification and clean energy.
Investors in search of opportunity across a sometimes-challenging global M&A landscape appear to be embracing opportunities in the small to mid-market sector.
The generational shift towards digitalization and electrification across different industries, and widespread efforts to transition towards clean energy, have driven considerable deal volumes across 2022 and are widely expected to maintain momentum into 2023.
Digitalization alone may be worth up to $1 trillion annually by 2025, according to a number of estimates, with investment volumes many times that number – and there may not be enough zeros to measure accurately the value of the ongoing electrification and decarbonization of transport, power and industry.
Global M&A, with one eye on what are often less encouraging forecasts for more traditional sectors, reflects this new reality.
Shifting horizons
"Everything is digital, everything is electric, everything is virtual and remote and cloud-based – and we are not going back in time on that," said Eric Fougedoire, Partner at RSM France.
"Technology that enables increased sustainability, that secures the necessary engineering capabilities, those areas are proving resistant to whatever downturn we may be experiencing," he added.
The currency involved in these types of deal is often Intellectual property, particularly with regards to software, technology and human resources, according to Oliver Smyth, Partner at RSM Norway.
"Software remains very hot, in particular in the business to business (B2B) and software as a service (SaaS) space" he said. "Investors naturally consider recurring revenues and a stable customer base as highly attractive in the current market. Especially if there is some insulation from rising input prices, if the company can pass them onto the end customer, and supply chain issues. We have seen this across numerous deals in the Nordic market in particular.”
The upside from clean energy is equally attractive, said Marcel Vlaar, Financial Due Diligence Director at RSM Netherlands. "In terms of energy transition, private equity and other investors are aware that it is a growth market where there are opportunities for buy and build, for instance across a wind portfolio or a combination across solar manufacturer and installation, or finance and installation – taking some of the risk out of the equation by integrating both horizontally and vertically."
Meeting the challenge
Of course, the trend towards digitalization, electrification and clean energy carries its own challenges in M&A, particular in terms of expertise and flexibility among advisory services and due diligence.
Valuations, ESG, potential cross-border impacts, cybersecurity, global drivers including inflation, interest rates and geopolitical events – all require conscientious and considered application of experience and adaptability.
"The small to mid-cap markets have been busy, even while trying to minimize exposure to energy prices and cost-of-living impacts," said Lee Castledine, Partner at RSM UK and member of the RSM Global Financial Due Diligence Leadership Team.
"There are plenty of opportunities to be grasped and a cautious optimism among many of those involved in M&A," he added. "There are many reasons to look forward to 2023-24."