How are current/planned transactions performing in the current political environment?
A distinction must be made here according to sectors. Depending on whether a sector or a company has “externalities”, i.e. supply or sales relationships with foreign countries, perhaps we should specify “non-EURO foreign countries”, we observe that sales processes stall or are immediately postponed. In concrete terms, this means that the healthcare sector, and healthcare services in particular, is booming unabated. Local services are not affected by events in Ukraine or Asia, by energy prices or even inflation, although staff shortages may play a role. It may even be that interest in this segment has increased even further, although this is hard to imagine. The situation is similar, depending on the business model, with technology companies and, in some cases, impact investments. We observe that investors continue to be very active in these segments and are getting their money’s worth.
In areas other than those mentioned, it is much more difficult. Companies that need intermediate products, raw materials or even energy from abroad are not only affected operationally by the current conflicts, inflation and the uncertainty of the near future. These circumstances naturally also affect valuations on the market. In addition, there is the readjustment of the geopolitical landscape. For example, how should an investor instantly value a company with strong sales to China? Recent political statements make the continuation of historical figures and the resilience of business plans appear questionable. For these reasons, we see ongoing processes faltering in many segments. Announced lawsuits are a long time coming. Many medium-sized companies and also private equity funds that have been considering a sale will now initially focus on operational adjustments, at least for the 12-month period they have mentioned. This could be the establishment of alternative production sites in Asia, e.g. in Vietnam, Cambodia or Thailand. I also hear a lot about plans by companies to produce in Central and Eastern Europe, also from a sustainability point of view.
Medium-sized companies in particular will say: I will also manage this crisis well on my own and overcome it by preserving or creating value. À propos Central and Eastern Europe: I think that — if the situation in Ukraine calms down — we will see a revival of the region. Now that everyone knows where the Black Sea is and where Ukraine is, awareness of the region has increased. The talent pool is tremendous, and I hear from regional institutional investors who are building the bridge between local human capital and Western European companies.
In view of these developments, I also see different price trends for the various sectors. In the aforementioned healthcare services and technology segments, I do not expect major price changes, although in view of rising interest rates it remains to be seen whether investors are prepared to adjust their return expectations.
In sectors more affected by the “external” circumstances described above, one would expect prices to fall. However, I rather expect that these companies will not even go to market, as owners will wait until the fog clears. This may mean longer holding periods for private equity funds active in these segments. And at the same time, unless they shift their investment focus, they will make fewer investments. At the same time, they may see challenges in fundraising: falling equity markets also mean lower allocations, in absolute terms, for institutional investors (limited partners) in private equity funds. Perhaps this will lead to smaller-volume funds (with an identical investment focus). It remains exciting in any case.
About Nikolaus von Jacobs
Dr. Nikolaus von Jacobs advises private equity funds and German industry players on private equity, venture capital and public and private M&A transactions. He is a member of the Corporate Practice Group and head of the German private equity activities at McDermott Will & Emery in Munich.