Across Europe, corporations are sitting on about €2.6 trillion in bank deposits, almost double the amount seen just a decade ago. Meanwhile, private equity (PE) firms are itching to sell.
It should be a match made in M&A heaven. But the deals aren’t happening, at least not at the pace this market needs.
Several forces are behind the sluggishness. While share buybacks are becoming more generous, corporate cash is not yet deployed for capital expenditure on data centers, artificial intelligence, and infrastructure at the scale seen in the US. Persistent economic uncertainty is one reason, though corporates are arguably over-defensive. In a rapidly changing world with pressing needs for corporate investment, hoarding cash is only a temporary strategy.
PE firms also face challenges. After a buying spree between 2019 and 2022, many are holding companies they’re struggling to exit. The average hold period for PE funds has increased to more than six years, up from five years in 2020, according to data from Preqin. That’s because the IPO market remains nearly frozen, while secondary deals among general partners (GPs) still represent only a small slice of exits.
On a high level, this disconnect is the result of strategic misalignment. But both corporates and GPs can make a series of tactical and behavioral moves to address blocks and encourage deals.
Five actions for corporates to prepare for PE deals
To capitalize on the PE backlog, corporates need to take a more proactive and strategic stance. In particular, they can take the following five actions:
Prepare ahead of the process. Build internal M&A muscle. Know your financing capacity, approval processes, and synergy thresholds.
Map the PE landscape. Use databases, advisory networks, and banker intelligence to track who owns what across verticals of interest.
Engage directly and early. Set up off-cycle discussions with PE firms and target management teams, even if no deal is formally underway.
Get creative on structure. Explore minority stakes, joint ventures, earn-outs, and post-deal collaboration models. Flexibility can unlock value.
Expand your advisor ecosystem. Legal, financial, regulatory, and communications advisers may each have a unique view on what’s coming to market and which obstacles can be overcome.
How PE firms can make their businesses attractive targets
For PE sellers seeking a strategic exit, here’s how to make a business more likely to be bought by a corporation.
Map trade exit options from day one. Even at the point of acquisition, identify likely future strategic buyers and what they may need to get comfortable.
Get ahead of regulatory concerns. Antitrust, sector-specific licenses, and foreign ownership restrictions can derail a deal. Have a mitigation strategy ready.
Engage beyond the banker. Your advisers may not know all the strategic players. Reach out directly to corporate strategy teams and other advisers.
Tell the strategic story. Help the buyer articulate how your business fits into theirs, financially, operationally, and culturally. Go beyond spreadsheets.
Support carve-out options. If a buyer wants only a piece of an asset, be ready to offer just that, perhaps with transitional service agreements or a co-investor to take on the rest.
Be flexible on deal structure. Consider holding a residual stake or board seat to align incentives and share in long-term upside.
Promote the management team. Many corporates are as interested in talents as in assets. Highlight leadership credentials, succession plans, and retention incentives.
The current market opportunity is too big to ignore. With corporate dry powder near record highs and PE exits increasingly constrained, now is the time for both sides to rethink how they engage to reap profits.
