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After 2021’s boom in mergers and acquisitions (M&A) activity – a boom largely driven by pent up demand over the lockdown period than anything else – there was always a fear that this demand would be short-lived. Not only were these fears proven to be factual, the series of unfortunate economic events that have come to define 2022 so far make it clear that a short-lived boom was the least of our concerns.

With significant business disruption, high inflation, supply chain struggles and uncertainty surrounding the conflict in Ukraine, buyers and lenders are still operating with an air of caution.

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However, private equity funds aren’t as easily phased by today’s current economic landscape, and with increased competition for top quality, undervalued assets, P2P transactions are likely to play a key role in the public M&A landscape over the years to come.

Private equity bidders have high levels of capital to deploy

Over the last few years, private equity has played a crucial role in driving M&A transactions. And while some believe rising interest rates will make private equity less competitive when bidding for assets, which may account for the decline in public to private transactions in H1 2022, private equity funds have record levels of capital to deploy.

Find out more about P2P transactions

Private equity (PE) fundraising rose steadily between 2016 and 2019, dipping in 2020 but rising by 22% in 2021, according to data from .

In the ������Ƶ Market Tracker Trend Report - trends in UK public M&A in H1 2022, James Bole, Partner at Clifford Chance, said:

“In recent years, P2P activity has accounted for the majority of successful UK public bids over £1 billion and financial investors still retain significant sums to deploy."

Private equity bidders will most likely look to take advantage of today's market conditions, said Allan Taylor, Partner at international law firm, White & Case:

“We are still seeing a significant amount of activity, both with deals announcing and behind the scenes, and competition for assets continues apace. We expect bidders, in particular PE, to take advantage of the market conditions and larger P2P transactions to come back with financing still available for the right targets."

Aggregate deal value of P2P transactions for H1 of 2022 sat at £9.6bn (H1 2021: £12.9bn; H2 2021: £31.1bn) and the average deal value was £964m (H1 2021: £807m; H2 2021: £1.6bn). Private capital played a key role in the largest transactions, with three of the seven £1bn plus takeovers announced in H1 2022 being P2P transactions.

Will rising interest rates dampen M&A activity?

M&As involving public companies are slowing as a result of rising interest rates and the growing threat of a recession, said Selina Sagayam, Partner at Gibson Dunn.

“Last summer the view was that interest rates would stay at ultra-low levels – that too has changed, with markets expecting UK rates to rise to around 3% by the end of 2022."

This combination of higher inflation and higher interest rates will result in slower growth, says Sagayam, with the Bank of England forecasting that the UK will show no growth in the next year and a half.

“These pressures are coming to bear across the UK economy and public M&A is one of the areas we are starting to see the impact.”

A recent found M&A will be one of the first areas to face cuts in organisations feeling the impact of rising inflation.

With listed companies’ share prices being depressed and a weakened sterling, this may present opportunities for some buyers.

Iain Fenn and Dan Schuster-Woldan, Partners at Linklaters, said:

“Debt financing markets are cooling and becoming less permissive than they have been in recent years and interest rates are rising, which one would suspect would suppress activity. At the same time there remain record levels of private equity and other private capital to be deployed and the share prices of listed companies remain depressed presenting real opportunities. Increasing inflation and interest rates are expected to drive increased activity in the refinancing and restructuring space, which in turn may lead to M&A activity.”

US bidders are eager to invest in the UK market

US investors have put more money into UK companies in the first five months of 2022 than they did in the whole of 2020, according to commissioned by the Digital Economy Council. US companies invested £6.1 bn between January and May 2022, compared to £6 bn throughout the whole of 2020.

Fenn and Schuster-Woldan at Linklaters said they anticipate US investment to be strong in the near future: “We expect continuing foreign interest in UK public companies, particularly from the USA and Canada.”

Despite the current geo-political and economic turbulence, there's a very resilient appetite for public M&A from US bidders, says Patrick Sarch, Partner and Co-head of UK M&A at Hogan Lovells.

"Large-cap deals are still hitting the front pages, including the Shaftesbury/Capital & Counties £5bn merger (where we’re acting for Shaftesbury). M&A pipelines look surprisingly strong, with many waiting for the right time to execute carefully selected strategic investments or ‘bargain-hunting’ for undervalued assets, particularly where recent levels of competitive bidding tension are subdued."

Read more analysis and commentary on the current state of corporate law. Download our GLP Index to find out how corporate law is predicted to grow in the years to come.