Recent metaverse exploration has often focused on immersive virtual worlds where consumers interact through an avatar. In 2023, other potential use cases for immersive digital worlds are expected to develop more quickly than the consumer-focused metaverse; the "industrial metaverse" will come to the fore. Digital worlds will remain big business for entertainment, however, with video games more popular than ever and esports viewership on the rise.
Industrial metaverse: The application of metaverse technologies to industrial use cases has the potential to be transformative for operational efficiency and facilitating research across sectors. Augmented and virtual technologies combined with robotics can enable experts to perform tasks in an immersive environment with real-time data while operating at a distance from the asset being repaired or the patient being treated. Virtual representations of physical properties or machines – "digital twins" – can enhance their real-world operation and efficiency, as well as allow for potential changes to their operation to be simulated before being implemented in the physical world. Companies, private investors, governments and law-making bodies are paying attention: China has released a four-year "Virtual Reality and Industry Application Integration Development Action Plan", South Korea plans to invest in a metaverse ecosystem as part of its 'digital new deal' and the EU is expected to publish its metaverse strategy later this year.
"The applications of the industrial metaverse are ripe. The technology is there to have digital twins and smart hands on-site. Instead of the "Ready Player One" consumer metaverse, in 2023 we're going to see an industrial metaverse that looks more like a hyper-realistic version of the scientific method."
Shifting economic conditions will bring changes in deal-making activity in 2023. We will see strategic consolidation through bolt-on acquisitions and business co-operation, as well as an uptick in carve-out transactions. This year we will also see a focus on strain in the technology supply chain. Today's businesses have more complex technology stacks with multiple points of potential supplier failure, and the trend for businesses to rely on supplier-controlled cloud solutions and to engage growth businesses for core technologies means that supply chain distress can have significant ripple effects.
Tech M&A: We will see increased use of targeted due diligence, tailored contractual mechanisms and creative planning to get deals done quickly in shifting market conditions or to seize time-sensitive opportunities. These will include increased use of indemnity protections, 'earn-out' mechanisms, post-close due diligence tests and remediations, employee retention pools and equity rollover packages. Adjusted due diligence will focus on technology and data as key growth drivers and dependencies, as well as on supply chain risk and resilience.
Tech supply chain distress: There will be scrutiny on potential distress in the tech supply chain. Financially robust businesses will be looking to transform in response to an increased focus and requirement for ongoing and long-term operational resilience. They will be building systems and processes to manage disruptive issues that could impact business continuity, such as cybersecurity and supply chain risk.
Carve-out transactions: We'll see increased collaboration through consolidation as companies come together to combine resources, technology and expertise for greater efficiency, innovation and growth. This will include consolidation of fintech platforms, particularly in the digital trade space. We may also see more disputes in relation to collaborations in 2023 where changes in market demand, competitor activity, and legal frameworks strain existing partnerships, or where regulatory action occurs.
For more, see Opportunities in a downturn: The private M&A play for distressed tech companies in the US.
"Technology is at the heart of many transactions and supplier engagements. They can often be win-win arrangements, but the key is thinking about technology early in the process. We are going to see a difficult 2023, but that presents opportunities for well-advised businesses."
"We're going to move from a race for adoption and scale to a race for consolidation, collaboration and partnership. In the last few years we've seen so many players coming onto the scene, disrupting the financial markets, looking to get airborne – it's now a case of who is going to stay airborne."
Certain technologies will see significant investment activity and cross-sector collaborations and consolidations – including crucial components and infrastructure that underpin digital connectivity, and technologies that support energy transition goals. The critical nature of such technologies has not escaped governmental and regulatory notice. We will continue to see forms of digital protectionism that use legislation to stimulate or protect certain industries or technologies, both boosting and complicating transactions and other agreements relating to these technologies.
Net-zero tech: A combination of climate change imperatives, energy security concerns and technology sovereignty policies means markets are seeing a radical uplift in investments and transactions relating to technologies for energy transition. In the US, the Inflation Reduction Act is using huge subsidies to expand domestic manufacture of clean energy, batteries and electric vehicles, and reduce dependence on imports. The EU has responded by announcing its "Green Deal Industrial Plan", which will facilitate subsidies for green industries. These investments are being mirrored, and exceeded, by private finance as green technology businesses are attracting increased private equity and other investments. Energy transition targets (such as the UK's combustion engine ban by 2030) are also playing a role in driving traditional industries, such as automotive and power, to transform their business models. These businesses are pursuing partnerships and collaborations with companies that can provide technology or license intellectual property that support their transformations. Among the legal considerations for investments and transactions in this sector will be foreign direct investment controls and antitrust laws.
"Semiconductors will continue to be an area of regulatory focus in 2023. High profile transactions in this space were blocked last year. There can be ways to structure transactions to alleviate the concerns of authorities, but forward planning is crucial. It is also essential to be on top of export controls and licensing restrictions, which can attach to an item for its lifetime."
Investment treaties: Alongside increased government intervention in investments in certain technologies, changing policies around data use, digital regulation and ESG requirements are significantly impacting a number of business models – including in relation to cloud computing, digital assets, data centres and digital advertising. At the same time, the number of tech-related disputes being brought by overseas investors against states under investment treaties has steadily grown. Investors are turning to investor-state arbitration to seek redress in relation to governmental actions or omissions that have had a significant impact on the viability of an investment. In 2023 we will continue to see foreign investors engaging in investor-state dispute settlement and considering the availability of treaty protection prior to making significant investments in another jurisdiction. Larger players may even be able to negotiate direct agreements with host states, providing recourse to investor-state arbitration.
For more, see Tech Arbitration Trends 2023.
"Space is no longer the realm of governments only – although they continue to invest heavily given the current geopolitical climate. It is now also the domain of private companies, known as New Space, which ranges from small start-ups to major multinational enterprises."
"Space is a critical field, with huge potential and it's fueling appetite worldwide. With the development of the sector come important questions in terms of digital sovereignty, resilience, autonomy. We're seeing this in Europe for instance, including with major programmes in the pipeline. But this is a global issue, with important geopolitical ramifications."
With unprecedented levels of content consumption and 'connected things' across increasingly diverse locations, the demand for better, more resilient, and ubiquitous internet connectivity has never been more important. There will be continued investor interest in traditional digital infrastructure classes – fibre optics, towers and data centres – as well as pioneer investors looking for novel opportunities in adjacent technologies, use cases and infrastructure.
Increased regulatory controls for data centres: Data centres will continue to come under the microscope of regulators as they consider the environmental, planning, data protection and national and global security issues that data centres present.
Key focus on ESG opportunities: While especially relevant for power-hungry data centres, ESG issues and opportunities will remain a central consideration for many digital infrastructure investments in 2023. Private communications networks, for example, provide the vital underpinning infrastructure for energy-efficient smart buildings, smart cities and next-generation power generation and transmission infrastructure.
Beginnings of Alt-Net consolidation: Space for "fibre to the premises" (FTTP) building alternative network providers (alt-nets) is starting to reach saturation point in many large markets. We will see consolidation driven by the current economy climate. With the assets still possessing sound fundamentals, opportunities will exist for well-positioned operators and investors.
"Savvy investors will seek out opportunities backed by genuine consumer use cases that result in sticky – and inflation-proof – revenue models. With digital infrastructure assets possessing sound fundamentals, much opportunity exists for well-positioned operators and investors."
"We're seeing a reimagining of how energy transition can be achieved through the integration of technology with infrastructure. Smart infrastructure has been increasingly used to maximise efficiencies and performance, and we're going to see that step up to the next level. We'll also see continued investment in things like data centres and the cloud."
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Clifford Chance
