Acquisition Trends

Pricing Structure

92% of transactions in 2024 used the locked box pricing mechanism.

Use of the locked box pricing mechanism is in line with what was seen in 2023. This reflects a return to more standard market practice following a decrease of locked box transactions during the COVID pandemic era and acceptance of the locked box mechanism by buyers who were traditionally sceptical of this approach (for example, trade buyers and US financial sponsors).

As a result, completion account mechanisms are typically only used for transactions where there are no accounts available for locked box purposes – typically carve outs from large corporates or smaller bolt-on transactions where the financial records are not sufficiently robust.

On private equity deals using a locked box pricing mechanism, 50% featured an equity ticker, a decrease on 2023’s figure of 67%. This is reflective of the continued difficult market conditions for sellers in 2024, but we do not expect that this will become a long-term downwards trend once market conditions begin to improve.

There was a strong increase in the number of deals featuring an earn-out in 2024, with 38% of private equity deals including some form of earn-out, which is much higher than it had been in pre-pandemic years.

Once again, this is a reflection of the deal market in 2024 as earn-outs are typically used to bridge valuation expectations between sellers and buyers and often in scenarios where there is less competitive tension. We would expect to see the number of earn-outs decrease again as gaps in valuation expectations decrease and sellers look to favour certainty of proceeds, though this will continue to depend on the competitive tension on any particular transaction.

72% of all deals required a split exchange and completion.

While a split exchange and completion is frequently required because of funding/drawdown necessities for sponsors and lenders, with longer gap periods required on transactions involving debt funding from credit funds which typically have longer drawdown periods than banks, increasing regulatory intervention is also driving this high percentage.

It has been increasingly common on transactions of all sizes (rather than just larger transactions as was historically the case) that a split exchange and completion is also required to necessitate some form of merger control or foreign direct investment (FDI) approval, whether due to anti-trust laws or FDI legislation (such as the National Security and Investment (NSI) Act in the UK, CIFIUS in the US, FIRB in Australia or the EU’S Foreign Subsidies Regulation).

The ever-increasing international scope of asset managers’ portfolios, combined with low filing thresholds in a number of jurisdictions, has meant that mandatory anti-trust and FDI filings are often required even in jurisdictions where there is only a limited nexus to the transaction involved or an asset manager’s wider portfolio. In 2024, 50% of all transactions which had a split exchange and completion were subject to an anti-trust and/or FDI condition.

In 2024, the UK government published its response to a call for evidence on the NSI Act. This included an updated market guidance and section 3 statement, which explains how the Secretary of State expects to exercise the call-in power under the NSI Act. Whilst both aim at providing greater clarity on the regime, notably there is no clear definition of “national security”, leaving the government with flexibility to intervene in transactions where it deems necessary. Accordingly, the market is likely to continue to take a cautious approach to submitting notifications under the NSI regime. Given the NSI Act has no de minimis exemptions, it is not only large value or high profile transactions that are affected.

The Closer Look section of this year’s Private Equity Market Insights covers this topic in more detail and the impact of the ever-broadening scope of M&A related regulation on the private equity market.

Walkaway rights between exchange and completion, save for nonsatisfaction of a condition precedent, remain very rare in the UK and Europe on asset level transactions, although material adverse change clauses are a feature of some GP stake transactions. On asset level deals, where walkaway rights are agreed, these are typically linked only to specific business risks rather than for general material adverse change.

Given the increasing number of transactions requiring merger control or FDI approval, which involve longer gap periods, the practice of repeating warranties has become far more common, particularly as it has become an affordable W&I policy enhancement. 70% of transactions with a split exchange and completion had business warranties repeated on completion, a notable increase from 2023.

On transactions that had business warranties repeated, we did not see buyers having the ability to walk away or renegotiate price based on matters disclosed during the gap period. Instead, repetition of warranties is being used to drive disclosure of material events in the gap period and giving the buyer the opportunity to obtain enhanced coverage under its W&I policy, enabling claims for non-disclosed (typically unknown) warranty breaches that occurred during the gap period.

However, in transactions with short gap periods, buyers will still often take the view that there is not significant value to be gained from a risk allocation perspective of getting warranties repeated on completion, especially as it requires sellers to have to repeat their disclosure process. Therefore, it remains the case in most transactions that buyers take on most, if not all, of the risk in the business from the signing of the SPA.

Threshold & De Minimis

The most common claims threshold (being the financial threshold which warranty claims must exceed in order for financial recovery to be permitted) continues to be 1% of enterprise value as against the warrantors under the business warranties.

The most common de minimis (being the minimum amount of any claim to be permitted or permitted to count towards the threshold) continues to be 0.1% of enterprise value.

These statistics have been consistently static for the past few years, although there is increasingly flexibility to have a lower threshold and de minimis in a W&I-backed transaction – insurers tend to offer as standard a threshold/deductible of 0.5% or 0.25% of enterprise value, subject to underwriting.

Time Limits

48% of transactions last year featured a “blanket awareness” qualifier applied to business and tax warranties, this increased to 91% for transactions with an enterprise value of over £250 million, broadly consistent with the figures seen in previous years.

On transactions where a blanket awareness qualifier is included (or indeed any transaction where some of the warranties are qualified by awareness), it is common for a W&I policy to include a “knowledge scrape” enhancement (typically for an additional premium). For the purposes of the policy, some or all of the warranties which are qualified by the awareness of the warrantors will be deemed not to include this awareness qualifier.

In the UK and Europe, a 24-month term is typically the longest enforceable period in a sale and purchase agreement unless there are strong reasons to extend it (for example, businesses with heavy intellectual property aspects, where competition from the covenantor could seriously damage the target business).

In 2024, the most frequently observed duration was 24 months, although anything between 12 – 24 months is typical, with this being a point regularly negotiated in sale and purchase agreements.

It remains uncommon for financial sponsors to agree to widespread restrictive covenants. Still, some have shown a willingness to provide non-solicitation restrictive covenants in sale and purchase agreements in respect of key executive managers. The scope of such restrictive covenants is largely deal specific but usually relates to only a few, named key individuals.