7 December 2022
After COVID-19 lockdowns abated in early 2021, a sharp economic recovery was positive in the short-term but soon led to an overheating of the global economy. Then, the Russian invasion of Ukraine drove commodity price shocks and an energy crisis in Europe. These factors combined with supply chain disruption caused broad volatility in financial markets.
Supported by strong demand for commodities, full employment and economic and geographic distance from Europe, the Australian economy remained relatively resilient, although not immune to global trends.
With inflation at a 40-year high, central banks rapidly tightened monetary policy, creating a backdrop that has required markets to digest a substantial increase in the cost of capital.
Global M&A deal value is down 43 per cent year-to-date on 2021, partly due to uncertainty in the global outlook, capital market volatility and significant challenges accessing debt-funding for larger M&A transactions. Despite these challenges, M&A activity in Australia and New Zealand for the year to date is still ~30 per cent higher than long-term average levels1 (with the exception of the record year in 2021). Continuing the 2021 trend, the technology, infrastructure and critical minerals sectors remain the focus of deal activity, accounting for ~60 per cent of deal volumes in 20222.
We see several structural trends that will drive investment opportunities and capital allocation in 2023 and beyond. The electrification wave to address the energy trilemma will require a coordinated response of unprecedented scale, digitisation will remain in focus as technology continues to change the way businesses function and deliver for customers, and finally, governments will look for support from the private sector to deliver their significant policy agendas, in an environment of fiscal restraint.
Against a turbulent and uncertain background, Australia is well-placed compared to other economies due to its relative geographic and geopolitical insulation, position as a net energy exporter, and resource-rich economy."
Head of Macquarie Capital, Asia-Pacific
While renewables are cheaper than fossil fuels, we must take the cost of storage capacity into account. Australia will need more than 30 times the storage capacity we currently have6 to enable a renewable energy transition."
Chairman of Macquarie Capital, Chairman of Critical, Minerals & Energy
In a tight labour market, improving employee engagement and focusing on wellbeing is critical to attracting and retaining talent. This is an example of how ESG performance can benefit employees and communities and improve operational performance."
Global Head of Private Capital Markets, Macquarie Capital
Whilst high-growth technology valuations have sharply declined, M&A activity has been supported by investors seeking increased exposure to the digitial economy, traditional businesses addressing technology defecits and technology businesses adding capabilty and scale. In particular, cloud-hosting solutions, supply chain technology and cyber security are more important than ever.
Technology transactions now account for approximately one third of global private equity buyouts8, with record low multiples and $A1.8 trillion of private equity “dry powder” setting the scene for technology M&A to bounce back in 2023.9
Australia provides investors with an opportunity to take local best-in-class technology companies and globalise them. Australia also provides a compelling entry point to the broader Asia-Pacific region for technology that allows investors to diversify across a multitude of geographies."
Co-Head of Macquarie Capital, Americas
Geopolitical concerns and global supply chain disruptions have highlighted the need for increased private investment, supported by government policy and incentives. Opportunities include the onshoring of critical products like vaccines and critical minerals and investing in defence and cyber security capability."
Head of Industrials, Australia and New Zealand , Macquarie Capital
While the short-term outlook remains uncertain, these macroeconomic challenges are likely to abate at some point in 2023. It is likely that we will see inflation and interest rates peak and supply side constraints reduce (particularly labour shortages as immigration returns to normal). The timing and form of China’s re-opening will also be a key driver.
While Australia will not be immune to global challenges, it is relatively well positioned for a softer landing than other developed economies.
We encourage investors and managers to focus capital allocation in areas of structural opportunity: electrification, digitisation, ESG and public-private partnerships with government in policy priority areas such energy, defence, education, health and security.
It's critical to take a longer-term view and focus on areas of structural opportunity, rather than just focusing on macroeconomic factors. The continued themes of electrification and digitisation are examples of areas that will require substantial investment and drive significant M&A activity; while private sector collaboration will play a critical role in the delivery of important government policy goals in healthcare, education and infrastructure."
Global Head of Macquarie Capital
1. 2. Dealogic, 25 November 2022. Announced transactions with any Australian or New Zealand involvement, deal value >$A50m and where the acquirer post transaction obtained control of the target (i.e. final stake of the acquirer in the target post the transaction is >50%), excluding announced transactions withdrawn.
3. 4. International Energy Agency (IEA), World Energy Outlook 2022.
5. 6. Requirements under AEMO’s Step Change Scenario to achieve Net Zero by 2050 – ‘2022 Integrated System Plan (ISP), AEMO (30 June 2022), https://aemo.com.au/
7. PWC, ESG Reporting in Australia 2022.
8. 9. Bain & Company, ‘How Private Equity Keeps Winning in Software’, 7 March 2022, https://www.bain.com/insights and EY Press Release, ‘M&A activity remains resilient in 2022’, 6 September 2022; https://www.ey.com.