2020 was a stark reminder that unforeseen economic events can sometimes change everything. And yet, equity and debt capital markets smashed activity levels during 2020, in response to pandemic-related lockdowns. Optimism remains high for 2021 – and a recovery in M&A is expected – but deal makers are conscious of risks.
- Refinitiv’s Deal Makers Sentiment Survey of 460 international deal makers revealed that they believe the primary deal factors will be COVID-19 and recessions.
- A significant new deal-driver is sustainability compliance, with pressure coming from the private sector, nation states and regulations such as the EU’s Sustainable Finance Disclosure Regulation.
- Deal makers also consider that global trade and protectionism will continue to be key risks.
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The deal-making horizon has become clouded with an ever-growing number of risks – none of them small.
One of the top macro-economic factors called out as likely to impact deal-making in 2021 is (unsurprisingly) ‘pandemic & preventative measures’, a new and unwelcome category in Refinitiv’s Deal Makers Sentiment Survey of 460 international deal makers.
A ‘recession in one or more developed economy’ was also one of the top identified factors. However, given that several developed markets saw the worst economic contractions in centuries during 2020, it’s a factor that may be considered a risk to M&A bankers and a potential driver of activity for their debt and equity market counterparts.
Existing risks persist for deal makers
While new factors have emerged, existing factors and risks have failed to submerge.
The re-negotiation of global trade agreements and the impact of protectionist policies remain a concern for 70 percent and 65 percent respectively. Indeed, the pandemic may have increased tension in this area, too.
While all attention was on a U.S.-Sino trade-war back in 2019, the pandemic has revealed fundamental trading tensions across the world, with countries closing borders, and even liberal democracies expropriating key assets that happen to be within their jurisdictions, while using the machinery of state to overcome contractual obstacles to the protection of sovereign vital interests.
Sustainability to drive activity
Another 2021 entrant in into the panoply of deal risks are ‘requirements to meet sustainability goals and regulation’, cited by almost two-thirds of respondents.
These risks are formed by a push-pull dynamic of private sector pressure, including from major asset managers, sustainability and net-zero targets from a growing list of nation-states, and increasingly demanding regulation, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into force in March.
While various measures, in particular the SFDR, will significantly increase reporting and complexity, the impact of sustainable initiatives on deal-making is likely to be strongly net-positive. Companies, industries and countries will need to undertake major changes to their existing behaviours, operating models and businesses in order to meet environmental targets and expectations.
Against such a dynamic backdrop, the much-trailed departure from the EU by the United Kingdom on 31 January 2021, was quite the anti-climax.
For deal makers, opinions have changed little since the initial decision to ‘Brexit’ in 2016. Nearly 60 percent of deal-makers believe UK companies will become less attractive, while 65 percent believe companies from other European countries will become more attractive now that the UK is no longer part of the European Union.
There is less agreement on the impact to UK banks, with just over half of respondents expecting them to become less relevant, and 25 percent disagreeing with this sentiment.
Given the proliferation of complexity and risk that has been injected into the global economy, one might be forgiven for expecting the high levels of activity in ECM and DCM during 2020 to return to more normal levels.
However, Refinitiv’s Deal Makers Sentiment Survey finds that most capital markets players expect similar levels of growth from last year, while M&A bankers anticipate a recovery from the shock of 2020.
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