Macroeconomic and geopolitical pressures continue to broadly challenge the deal environment. However, positive influences in the sector drove a resurgence in deal activity in the latter part of the year — a trend that should continue as we move into 2023. These influences include more certainty on federal policy with the passing of the Inflation Reduction Act (IRA), continued support and emphasis on environmental, social and governance (ESG) strategies and broad investor interest in the sector’s asset classes, including renewables. Investor flight-to-quality behavior, or desire to move to less risky assets, also contributed to the interest.
While near-term deal activity accelerated following passage of the IRA, deal activity over the last twelve months (LTM) slowed somewhat in comparison to the rebound in deal activity observed in late 2020 and 2021.
Economic and geopolitical uncertainty remain a pressing factor. While executives in our latest PwC Pulse Survey show signs of optimism, 90% told us they’re concerned about macroeconomic conditions, more than any other issue. Deal activity in our 12-month lookback likely slowed in pace due, in part, to these pressures.
Power and utilities saw a decline in both deal volume and value during the LTM ending on November 15, 2022, as compared to full year 2020 and 2021. During this period, contributions from both strategic and inbound investors, as well as those focused on renewables, remained strong. The LTM saw 38 deals, down from 56 in 2021 and 42 in 2020. On a value basis, total deal value decreased to $37.9 billion, from $53.3 billion in 2021 and $48.4 billion in 2020. The two megadeals in the LTM, deals over $5 billion, drove 39% of total LTM deal value. Renewable deals drove 71% of LTM deal value.
While both deal volume and value took a step back, the investment themes continued to highlight the prioritization of ESG initiatives and investments in clean energy and infrastructure. As we progress into 2023, we expect increased certainty in federal policy, supportive ESG initiatives, broad investor interest and the rationalization of portfolios to continue to drive investment theses and deal activity in the sector.
Opportunistic M&A activity from a broad pool of investors is likely to continue, as additional clarity has been gained and macroeconomic factors are navigated.
Management teams in the sector continue to use the portfolio review process to allocate assets and drive returns amid macroeconomic pressures and the need to reassess portfolios against their core strategy and growth objectives. Companies that make timely and objective divestiture decisions and strategically manage their portfolios tend to be at an advantage in dynamic business environments, such as the one currently being navigated. An upcoming PwC study also has found that having a robust reinvestment plan can help companies be more open to divestitures.
We’ve seen divestitures become a key part of management strategy for power and utilities. These divestitures appear to be designed to ensure portfolios are aligned to core strategy and for future growth objectives. Assessment of core strategy and areas of growth varies across industry participants, with certain asset classes changing hands to allow each participant to approach the industry in strategically beneficial ways. We continue to see our industry evolve in ownership for various asset classes including nonregulated power generation, renewable exposure and utility investment.
“Decarbonization tailwinds, now supercharged with the Inflation Reduction Act, are expected to drive deals activity as investors rationalize portfolios and capital deployment into opportunities best supportive of their goals and investment avenues.”
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