United Kingdom

“Plenty of Dry Powder” – M&A Landscape is Changing but Capital and Investment Opportunities Remain

In conversation with IQ Capital’s Kerry Baldwin at the recent BVCA Summit 2022, Alistair Lester – global co-CEO for Aon’s M&A and Transaction Services says there is still capital ready to commit to new M&A deals, while the insurance industry is playing an increasingly vital role in helping to mitigate risk and facilitate deals.

Despite the recent economic headwinds, there is still plenty of ‘dry powder’ being held by investors looking to find a home for their capital said Aon’s Alistair Lester, pointing to a recent report from investment data company Preqin – Future of Alternatives in 2027 – which references a doubling of assets under management in the private capital alternative asset space by 2027. “That’s extraordinary,” said Lester, adding that there is a need to put all that dry powder to work which will continue to drive activity. “Even in downturns there are winners and losers [and] there will be sectors of opportunities.” But, he warned: “The big question is how long is it all going to last, how bad is [the economic situation] going to get and…how can we pivot to find a way through?”

Price Expectations Must Adjust Downwards

A particular trend in the M&A world said Lester, is how there has been an emergence of private credit funds to support buyouts. “The question on lots of people’s lips is how deep and how flexible that capital is and whether it can sustain deal flow throughout the downturn that’s coming.” Clearly, for that deal flow to happen, he added, vendors will have to adjust their price expectations downwards from recent years. “I was recently with an [investor] who not only talked about how much dry powder they have, but also made the point that they believe that the deals they do in the next 12-24 months will probably be the best deals they’ve made in a decade.”

Geographical Opportunities

Where those deals happen from a geographical perspective could be influenced by several factors, said Lester, who described “value opportunities from leveraging foreign exchange” in the UK, as well as a “pivot [of investment] in Asia to be less cross border and outbound, to be more regionally focused.” In addition, he added, the US is seeing a slightly counterintuitive “rush to bring businesses to the markets”. Why? “There are sellers who are so concerned about what’s coming that they want to try and lock in whatever value they can find now. There are a lot of owners of high growth venture backed businesses who are suddenly thinking maybe being part of a large global strategic is not as bad as they thought.”

There is also a trend towards strategic and private capital aligning more closely said Lester: “There are still relatively few but an increasing number of examples of strategics and private equity co-investing in transactions; both bringing different skills and different values to that table. We’re likely to see that accelerating. There’s an argument that the right type of strategic is going to be able to access credit in a more favourable way than private capital can in the current environment.”

The Intellectual Property Value

Against this backdrop, as investors look for ways to really identify and drive value in investments in tougher times, there is a great opportunity to look at the role that understanding the value in the growing intellectual property (IP) of businesses and targets will play in the years ahead. “There has been a huge rotation over the last 30-40 years from tangible assets to intangible assets,” said Lester, “and we don’t think it’s an area that has been fully appreciated in the booming markets that we’ve seen in the last few years.”

By developing the proprietary means in which to value those intangible assets, Lester added: “You are converting an intangible asset to a tangible asset. And what can you do with a tangible asset? You can raise finance against it.” Which is where the insurance market can bring its “deep pools of capital” to bear. “We’ve been very fortunate to attract – in a relatively short amount of time – over one and a half billion dollars of capital to high growth firms in debt instruments secured against their IP in a way that wasn’t possible only two years ago. It’s a fantastic example of insurance capital coming together and enabling growth.”

Of course, IP is created by the people within a business, and really understanding the people aspect of a transaction is crucial, particularly given the recently accelerated changing workforce dynamics, said Lester. “We had a client recently – a very traditional strategic investor – who was looking to bring in different capability into the business but was struggling to understand how high growth entrepreneurials were going to fit into a very corporate structure. Years ago, businesses would have just ‘smashed them together’ and it wouldn’t have worked. Now, there is a much more open mind about creating an environment and compensation structure which allows these individuals to feel as entrepreneurial as they can do within a large corporate environment.”

Insurance Capital Influences and Facilitates

Back to the role insurance capital can play in helping to alleviate other risk issues like cyber, tax and litigation, Lester concluded by emphasising that the insurance market has the ability to bring solutions and influence the pricing of deals. “The traditional way of pricing risk in investments and deals is you price chip and pay less for what you’re going to buy. You secure some element of contractual recourse against your selling counterparty, which may or may not be secured in some way behind the contract. Or maybe you defer consideration and you see whether the issue you have identified crystallises,” said Lester, who added that insurance is challenging those assertions. “In a big part of our business, we see a real opportunity to bring insurance capital to help deal with those issues. If you can insure away a specific deal issue – such as a potential tax liability or litigation risk – at a price and on terms which are more attractive than alternative ways of pricing those deals, then there’s an arbitrage opportunity which we’re seeing has been increasingly taken advantage of by the private capital industry over the last few years. We think, as we go into a more risk sensitive environment, this trend is only going to accelerate.”


Connect with us:


Alistair Lester
Global Co-Chief Executive Officer, EMEA M&A and Transaction Solutions | Aon

alistair lester linkedin


Charlie Garrood
Head of M&A and Transaction Solutions UK & Head of Infrastructure EMEA | Aon

charlie garrood email charlie garrood linkedin


Jake Tobin
Global Co-Head of Financial Sponsors | Aon

jake tobin emailjake tobin linkedin