North American M&A Ends 2023 Down 13%
According to Pitchbook, North American M&A peaked in 2021, declined in value 25% in 2022 and declined an additional 13% in 2023 for a cumulative drop from the 2021 peak of 35%. 2023 was the third softest year in the past ten about equal to 2017.
Factors contributing to the decline include:
- The threat of recession,
- The impact of inflation on financial performance in many sectors,
- Tight credit conditions; and
- Higher for longer interest rates.
The impact on private equity was even more severe than the overall M&A market
mostly because private equity acquisitions rely more on debt financing.
The value of U.S. private equity transactions also peaked in 2021 and declined in value 29% in 2022 and an additional 23% in 2023 for a cumulative drop from the 2021 peak of 46%.
Lower Mid-Market PE Valuations Drop Below 7x
According to GF Data, PE Lower Mid-Market ($10-$250MM in value) multiples dropped in 2023 but the variations are more pronounced in the quarterly data.
Credit Markets Impact on M&A
With the Fed slowing down its rate hikes, activity slowly began to rebound in the 2nd half of 2023, although M&A remained subdued while refinancings and recaps increased.
By the end of 2023, lenders required greater than 52% equity contributions for PE acquisitions hindering investors’ ability to generate attractive target returns.
Lower leverage multiples also contributed to lower deal values and a drop in deal count. According to GF Data, buyers in lower mid-market transactions were able to raise on average only 3.5x EBITDA in total leverage in 2023.
2024 M&A Outlook Looks Very Favorable
We agree with most industry participants who see a strong market for M&A in 2024.
- Inflation coming down to the Fed’s target – latest PCE at 2.9%
- Much lower threat of recession – Q4 2023 GDP was over 3%
- Interest rates – In Dec 2023, Fed announced intention to lower by 75 bps in
2024 - Seller expectations starting to adjust
- Continued availability of capital – Corporate balance sheets and Private
Equity Dry Powder remains robust - Aging baby boomers continue to need an exit plan
