Experts share what will drive dealmaking in 2020

Experts from MinterEllisonRuddWatts have shared what they think will drive dealmaking in New Zealand for 2020.

With its M&A Forecast 2020 report, the top-tier firm unveiled what it said is a positive but cautious outlook for M&A activity in the country in the year. Despite predicting a slowdown in M&A this year – characterised by a longer process and some deals falling through – the firm also shared silver linings and key factors dealmakers should keep in mind.

Silvana Schenone, partner and head of the firm’s corporate division, said that there’s a higher level of caution emerging within the market.

“More patience is required with deals taking longer, and parties will no doubt need to work harder to prevent transactions from falling over. We know that deals will still get done, but the nature of these deals may change,” she said.

MinterEllisonRuddWatts predicts the market to settle down, with further adjustment in deals that are perceived as expensive. It also predicts IPO activity to continue to be subdued, particularly on the NZX.

However, the firm expects an increase in M&A activity in the financial services sector, as well as an increase in the use of alternative funding structures driven by the response of New Zealand banks to new capital requirements. Divestments by private equity firms are expected to increase, the firm said, as it counted at least 56 investments ripe for sale, based on traditional holding cycles of three to five years.

Schenone points to a “cautious optimism” among private equity shops.

“In the private equity space, we predict that funds will continue to invest in quality assets with good performance records and solid plans for the medium to long term. But they will act with cautious optimism. For example, they may take a smaller stake initially, planning to acquire a larger potion later,” she said.

She also shared one possible cause of the continued cooling of IPO activity.

“With very few IPOs completed in the last 12 months, we predict the slowing of listings to continue with more businesses turning to other sources of equity. This is because of the perceived higher compliance costs and technical requirements demanded by the NZX,” Schenone said.

Neil Millar, corporate partner, said that the firm’s experts expect to observe a continued increase in risk mitigation, partly driven by recent examples of buyer remorse.

“Due diligence has ever increasing importance, with buyers often adopting a ‘wait and see’ approach before investing. Warranty and indemnity insurance activity is also likely to climb as bidders look for ways to reduce their risks,” he said.

Banking and finance partner Steve Gallaugher further explained why the firm expects an increase in dealmaking in his sector of expertise.

“The Reserve Bank’s move to impose regulatory capital increases on the country’s main trading banks is likely to lead to an increase in M&A transactions in the financial services sector. Such activity is anticipated as banks look to exit their capital-intensive assets and ration their capital,” Gallaugher said.

Gallaugher also detailed what alternative funding structures are expected to see increased use this year.

“We also expect a more prevalent use of alternative funding structures such as unitranche, term loan B, stretch-senior and mezzanine lending structures in M&A transactions here in New Zealand. Further growth of credit funds and non-bank institutions in the debt market, along with increased demand for specialist debt advisors is also likely,” he said.