Perspectives

Cost of capital: Rapidly rising interest rates cause many challenges. As the initial public offering (IPO) and high-yield markets remain practically shut, lending by credit funds will be key to providing much needed liquidity to the leveraged loan market and will likely put a floor under the M&A market. However, that capital will not come cheaply, and Lincoln expects we will see greater protections for lenders, such as increased covenants, going forward.

Valuations: Firstly, due to volatility in public markets it is now an imperative to have accurate, relevant and reliable private market benchmarks for deals to get done. Secondly, lower valuations provide opportunities for corporate and private equity (PE) dealmakers to generate healthy returns, thereby driving M&A activity, evidenced for example by a significant increase in public-to-private transactions thus far in 2022.

Geopolitical tensions: There is an increasing uncertainty related to the Russia / Ukraine conflict and China / Taiwan tensions. As a result, we are experiencing an energy crisis, supply chain disruptions and rising concerns around cyber warfare and information security. We are also seeing continued investment and deal activity in technology – particularly within digitization, cybersecurity and the supply chain – as a response to these dynamics.

Labor shortage: A workforce strategy will need to be a priority in any deal as we are amid the highest wage inflation in decades. “The great resignation,” skills shortages and growing stakeholder focus on diversity and inclusion will all impact future business performance. To further fill the skills gap, we expect to see increasing demand for managed services, automation and operational efficiency solutions.

Maximizing M&A: M&A will play an important role in corporate growth strategies. Companies should build trust with stakeholders and generate support for their M&A strategy that will deliver successful outcomes for the long term, and be ready to go when opportunity arises.

Set the stage for the next five years with bold moves: By using M&A to pursue opportunities while delivering value in a challenging economy, those who pursue strategical deals with a strong capabilities fit will be best positioned for success.

Capitalize on the value reset: Public and private market valuations are under pressure, offering an opportunity to create value.

Take advantage of structural drivers: Supply chain resilience, portfolio optimization; environmental, social and governance (ESG), digital transformation and security remain priority areas on corporate agendas and for investment.

Value creation and returns: Focus on sophisticated value creation strategies along with a laser-like focus on dealing with inflationary cost increases to generate returns, with models sufficiently stress-tested to consider various uncertainties across the top and bottom line.

Be competitive: Corporates are facing intensified competition for large targets as PE goes upstream and see attractive opportunities from peer-to-peer situations, keen to deploy large sums of cash combined with leveraging multiple arbitrage and premature public listings.