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As macroeconomic and geopolitical pressures continue, deal-making remains challenging.
FREMONT, CA: Geopolitical and macroeconomic pressures broadly challenge the deal environment. As we move into 2023, we expect to see a resurgence of deal activity as positive influences in the sector continue to drive activity. The Inflation Reduction Act (IRA) provides more certainty on federal policy, continuing support and emphasis on environmental, social, and governance strategies, and broad investor interest in renewable energy-based assets. There was also a flight to quality behavior among investors or a desire to shift assets with a lower risk profile.
Deal activity amid macro pressures: Uncertainty in the economic and geopolitical sectors remains a pressing issue. In the latest PwC Pulse Survey, executives showed signs of optimism, but 90 percent expressed concern over macroeconomic conditions. These pressures may have partially slowed down deal activity over the past 12 months.
The LTM ending November 15, 2022, saw a decline in deal volume and value compared to full years 2020 and 2021. Investors focused on renewables and strategic inbound investments, contributed significantly during this period. Thirty-eight deals were closed during the LTM, compared with 56 in 2021 and 42 in 2020. Based on value, the total deal value dropped to $37.9 billion in 2020 from $53.3 billion in 2021. Over $3 billion deals were done in the LTM, including two mega deals. LTM deal value was driven by 71 percent renewable deals.
Despite the decline in deal volume and value, the investment themes continued to emphasize ESG initiatives and clean energy and infrastructure investments. As federal policy becomes clearer, ESG initiatives become more robust, investor interest increases, and portfolios become more rational, investment theses and deal activity are expected to increase.
Investors will likely continue to pursue M&A opportunities as they gain additional clarity and navigate macroeconomic factors.
Portfolio rationalization is expected to continue: In the sector, asset allocation and return management teams use portfolio reviews to reassess portfolios against their core strategy and growth targets amid macroeconomic pressures. In dynamic business environments like the one we're experiencing today, companies that make timely and objective divestiture decisions and manage their portfolios strategically are at an advantage. According to a PwC study, companies are more likely to divest if they have a solid reinvestment plan.
