As one of the leading European law firms specialising in PE, with over 50 offices across 26 European countries, CMS is in a unique position to observe deal metrics and market trends.
For the purpose of the Study, data, including the main contractual terms of negotiated M&A documents, from over 100 PE deals that CMS advised on in 2021 were analysed.
We would like to take the opportunity to highlight some of the themes covered in the Study, while inviting the readers to consult its full version (which can be found ). While the findings of the Study are based on European practice, considering Luxembourg’s position as a leading jurisdiction and hub for the structuring of PE investments, the great majority of them are relevant for the Luxembourg PE practice.
As one of the leading European law firms specialising in PE, with over 50 offices across 26 European countries, CMS is in a unique position to observe deal metrics and market trends.
Key findings of the Study
Deal Activity. The Study confirms that PE deal volume was in line with general market trends, with a significant decrease in deal activity in 2020, the year of the outbreak of COVID-19, followed by an unprecedented level of activity in 2021.
In terms of situation in 2022, despite the economic difficulties and uncertainties relating to the war in Ukraine, the inflation (in particular, the energy price crisis) and the raise of interest rates, the PE clients interviewed in the framework of the Study reported that despite the drop in funds raised in the first half of 2022, compared to 2021 levels, fundraising goals remain ambitious amid an expected shortage in debt as a source of financing. In addition, given the large unspent capital held by PE houses, it is expected that the year 2022 will close with strong PE-led deal volumes, although perhaps not at the same exceptionally high levels of 2021. That being said, a common concern that appears to be shared by the PE houses is that the rising cost of debt may trigger questions around deal feasibility if the target has substantial debt and a refinancing is the only way to proceed with a change in ownership.
Deal drivers. The Study shows that, unsurprisingly, digitalisation has become an increasingly important deal driver for PE deals (11% in 2021 compared to 2% in 2019 and 2020) and a substantial part of the transactions analysed involved the technology, media and telecommunications sector. This may be the result of the COVID-19 pandemic, which boosted digital business models. It is, however, worth noting that digitalisation was far more relevant in PE deals than in trade deals, which may indicate that PE investors are faster to react to new market conditions.
New investments vs Exits. The Study shows that the last two years were not a good time to exit for many portfolio companies. Accordingly, we have seen significantly more new investments than exits. PE firms tend to be on the lookout for both divestments and acquisitions at any given time but are expected to continue prioritising the latter in 2022.
Management. In the majority of deals the existing management team stayed on to work for the portfolio and was allocated some shares as a way to share in the proceeds. Consistent with this tendency, as shown in the Study, top executives were required to rollover in most deals.
W&I insurance. Historically, PE investors have been pioneers in W&I, which is much less common in trade M&A. Unsurprisingly, the Study shows that W&I insurance plays a particularly important role in PE deals. The likelihood of W&I insurance being used increases exponentially with deal value. In higher value deals, W&I insurance coverage is now the standard.
PE firms tend to be on the lookout for both divestments and acquisitions at any given time but are expected to continue prioritising the latter in 2022.
Foreign Investment Control. The Study indicates that many jurisdictions now have tighter approval regimes for direct and indirect foreign investments (“FDI”). Where FDI controls apply, deals may often only close following government approval, which is therefore included as a condition to completing the transaction. It is expected that FDI will feature more prominently in PE transactions, given the rise in protectionism and concerns about foreign investors in nationally important industries. The impact in Luxembourg should however be less significant than in other jurisdictions given the structuring and financing position of Luxembourg in the cross-border investments.
The market becomes more balanced. In line with the observations in the CMS European M&A Study, the Study shows that the market is, from a contractual risk allocation perspective, marking a return to more balanced deal, after a long period of prevailing seller-friendly provisions. One illustration of this tendency would be the overall longer limitation periods for business warranties as identified in the Study.
Purchase price adjustments. As shown in the Study, when it comes to methods of contractually setting the purchase price, PE deals have a marked preference for locked box (i.e., the purchase price is set upon signing, with no adjustments on completion). Purchase price adjustments are not favoured by PE houses, which prefer the certainty and expediency of locked box valuations and, when on the sell-side, are keen to ensure that the price determination mechanism will allow them to repatriate proceeds swiftly following an exit.