David Brown

Ansarada: We have seen large amounts of M&A  activity since the second half of 2020 – higher than pre-pandemic. Do you think this level of deal activity will continue in 2022?

David Brown: To give some context to the current situation, the coronavirus pandemic has had an impact that has obviously been at the very front and center of everything that’s going on and is affecting everything in lots of different ways. But to go back a little bit, if you think about when the pandemic began, people were very negative, but it got better very fast from an M&A perspective.

A few things happened that people didn’t expect. One, the rebound in M&A happened much more quickly than expected – even though with a bit of hindsight, the way the pandemic has played out has been worse and slower than was anticipated at that time. M&A actually bounced back very aggressively. The second thing that people didn’t expect was that the anticipated wave of insolvencies and destruction didn’t happen. And the third thing to happen that people didn’t expect was that asset prices went up – although you have to be careful with that because in reality asset prices went up selectively in certain sectors and for certain assets, and not across the board as is quite often reported.

Ansarada: Why was this the case? And can we expect this level of activity to continue?

David Brown: First of all, if you compare 2020 with the global financial crisis in 2008, 2008 was a crisis of liquidity, while 2020 was almost – or may yet become – a crisis of too much liquidity. The banking sector was much better capitalized, there was no banking crisis. Private equity had two and a half times as much dry powder as at the time of the global financial crisis. And there were also very big allocations to other private markets asset classes, such as real estate, infra and credit funds – even if banks would not extend new money, credit funds were a massively more important source of capital than they were at the time of the global financial crisis.

On top of that, government and central bank stimulus really did its job. It was very effective. And that meant there were very few insolvencies. But it also led to this asset price inflation that you’re seeing, as well as that excess of capital in private markets. This is driving asset prices up and driving the market.

Number two is that the crisis itself drove transactional activity and continues to drive transactional activity. Corporates have been forced to review their
portfolios, how they’re going to allocate their capital, which businesses to hold and grow, and which ones to carve out and divest. That leads to transactional M&A activity. People are using M&A to acquire capabilities in digitization. There’s also massive acceleration around ESG and the net-zero agenda. People are using M&A to acquire capabilities in those spaces.

The third thing, that I touched on already, is the impact of private markets investing – private equity, real estate, infrastructure, private credit funds. The amount of capital, as I said, was two and a half times what it was at the time of the global financial crisis. There is pressure in the PE industry to invest that capital. 

Ansarada: You have mentioned high valuations. How is this affecting M&A activity?

David Brown: In my experience of doing this for 20-30 years, whenever asset prices are high, whenever public equity markets are strong, you get a lot of M&A. I think there’s a couple of human reasons for this. One is that sellers are prepared to sell. And often on the buy side there’s a fear of missing out when prices are rising very rapidly. That’s just a correlation that we always see, high asset prices and high equity market valuations equals high M&A.

Ansarada: What do you think will be the biggest potential risks or challenges for dealmakers in 2022?

David Brown: Geopolitical factors are among the biggest negative factors impacting M&A. The fall in outbound activity from China is an example of that, but I think crossborder M&A generally is quite difficult, whether it’s due to geopolitical tensions or just travel restrictions. For example, Japan’s outbound M&A into Southeast Asia in my part of the world has really dropped off a cliff. It’s not geopolitical, it’s just because Japanese executives like to travel and meet and look at things before doing M&A, and they haven’t been able to do that.

Ansarada: Do you expect greater scrutiny or new regulation regarding ESG globally or in your jurisdiction? How will this affect dealmaking?

David Brown: One of the big issues of ESG is the general lack of regulations and standardization. I think in Europe that is starting to be addressed and that needs to happen, because there’s a lot of confusion around that. There’s green washing – there are people investing in green assets that might not necessarily be green. Nobody knows what an impact fund is. There’s no common definition of that. There’s a lot of money chasing stuff without a clear methodology and mechanisms around the governance of that investment. And I think Europe is clearly at the forefront of this. Asia-Pacific is behind. I think the US is also behind, actually.

The metaphor I use is it’s a bit like driving on the motorway and you look in your rear-view mirror and you see this truck coming from a long way back. People have been looking back at that for a while now, but suddenly the truck has really started to accelerate, and it’s coming really, really fast. If you’d asked me the question about a year ago in Asia-Pacific, I would have said, “yeah, it’s important”. And if you’d spoken to PEs, for example, in AsiaPacific a year ago, you’d get “yeah, our LPs want us to have an ESG policy” – and it’s a bit wishy washy like that. Whereas now I think they’re starting to realize that this is real, it impacts value creation and it affects investment returns.