Choppy market conditions continue to dampen private debt activity, with bi-annual deal making falling to lowest level since H1 2020
The second quarter of 2023 saw 1111 deals completed, representing a 23.4%1 decline compared to the previous quarter, and a 47.9% drop-off compared to the same quarter in 2022. On a semi-annual basis, deal activity (256 deals) fell 36.2% compared to H1 2022. The prolonged slowdown in capital deployment continues to be driven, to a large extent, by tepid M&A market conditions, underpinned by wide buyer-vendor bid-ask spreads for assets and subsequent seller reluctance to exit investments in the current environment. On the financing side, lender appetite to put capital to work remains strong, however, heighted credit bars have naturally resulted in more-conservative decision-making on new opportunities.

UK market continues to remain subdued, as institutional investors seek out other European jurisdictions with superior, medium-term, growth outlooks
UK-based deal-making continues to subside, with volumes declining 26.1% from H2 2022 to H1 2023, and 41.4% from H1 2022 to H1 2023. LBO-focused deals in the UK sank to a record low since 2016, with only 18 recorded in H1 2023. From a longer-term perspective, UK activity (as a proportion of European deals) has steadily declined from 34.8% of all deals in 2021 to 26.2% of deals in 2023 YTD. In contrast, activity in (historically) less-traditional regions has picked up, with Benelux (for example) gradually rising from 10.1% to 14.1% across the same period.

Lenders remain focused on resilient and cash generative assets, however, leverage begins to slide as asset valuations and debt serviceability fall under the microscope
H1 2023 private debt deal activity continues to focus on Business, Infrastructure & Professional Services (26%), TMT (18%), Financial Services (22%) and Healthcare & Life Sciences (15%). Contrary to the previous quarter, however, leverage has started to decline across these four industries on an LTM basis. Compared to LTM Q2 2022, LTM Q2 2023 deal data reveals that the relative proportion of in-period deals in-excess of 4x fell from 71% to 61%. By comparison, the relative proportion of deals between 3-4x rose from 15% to 20%, and below 3x rose from 14% to 19%. This comes amidst an almost-unchanged prevalence in the relative split of deal structures, consistent with the observation that leverage has tightened across the board in the last 12 months.

New LBO activity slides as sponsors dedicate strategic focus towards generating alpha in their portfolio companies
New LBO-focused deals fell to their lowest level since Q2 2020, dropping to less-than 30% of all in-quarter activity. In contrast, bolt-on M&A and growth capital continue to remain prevalent at just-shy of 50% of all deals, indicative of sponsors continuing to focus on driving value in their portfolio companies. This trend has been broadly consistent across each of the lower-mid-market, mid-market and large-cap environments, reflecting the susceptibility of all participants to wider macroeconomic challenges. What has become more-apparent of late is an increased propensity for large-cap and mid-market sponsors to dip into lower-mid-market deals to drive buy-and-build acquisition strategies.

Moving forward into H2 2023, it will be interesting to see whether, and to what extent, any ‘snap-back’ in M&A markets starts to take effect. Buyers and vendors remain prepared to re-ignite deal pipelines, PE sponsors are eager to recycle capital to LPs, and private debt funds continue to sit on dry-powder in the wings, poised to release liquidity into the market.

1 On a like-for-like basis (i.e., by adjusting the deal count to reflect the same population of Lender respondents from the immediate prior quarter), these figures would respectively be: 108 and 22.9%.