Mid-Market M&A Demand Outpacing Supply: Q&A with Mufson Howe Hunter’s Michael Mufson 

Mufson Howe Hunter recently published its middle market M&A report for the first half of the year, including valuation and activity research for M&A and U.S. private equity. The report also addressed current market trends and significant developments within the industry.   

The Philadelphia-based middle-market investment bank, the city’s largest, revealed in its latest report that total U.S. M&A value was just over $452,334 million year-to-date in June 2024, up 16% from the same period a year ago, while U.S private equity dealmaking rose about 12% year-over-year, both in count and dollar terms. At the same time, exit value increased by approximately 15%, compared with the same period in 2023, though exit count remained flat at 626. 

Michael Mufson, managing partner at Mufson Howe Hunter, is optimistic that deal activity will continue to rise throughout the remainder of the year and sees compelling opportunities in infrastructure products & services, among other sectors. 

He also discussed what he is hearing from financial sponsors regarding motivation to get deals done amid the current economic environment and to what extent he has observed a shift in the way transactions are carried out. 

CM: How are middle market M&A opportunities for the rest of the year looking? 

MM: For the second half of 2024 we are already seeing an uptick in activity. Our firm is a middle market M&A firm that is focused on what we refer to as “first to market” closely held and family businesses. These companies have never tapped institutional capital markets for the most part. The increase in our pitching activity is always a forward indicator of the direction of the M&A markets.  

Why the increase? It’s a combination of factors. Prior to the COVID pandemic, many of the baby boomer owner-operated sought liquidity events. Many were in their 60s and 70s and needed liquidity for their wealth which was in the equity value of their businesses. With relatively low interest rates coupled with the exponential growth of private credit funds saw leverage multiples increase to fund majority recapitalization with private equity (PE) sponsors. The PE community was sitting on historically high levels of their dry powder, so the combination was greater demand than supply and valuations soared.  

The pandemic caused the market to slow at first then maybe a year into it, certain industries; those who were supplying the needs of the stay-at-home families from food, to home goods, ecommerce etc., experienced good times and deals were getting done.  That ended in early to mid-2023 when restocking in the supply chains saw demand weaken and the markets stopped partying. For the past 12 months, it’s been a long winter. Stats show a 30% to 40% drop in transactions activity.   

Now let me get back to the baby boomer business of pre-COVID. That did not just go away, just waiting for a better market. So that brings us to the current market.  With valuations unticking a bit coupled with lowering interest rates and massive liquidity; credit funds, PE sponsors, and corporate balance sheets, demand is out pacing supply.     

CM: Which sectors do you anticipate will be the most appealing and why? Have you noticed any recent, noteworthy transactions that have captured your attention?   

MM: I believe that certain sectors like infrastructure products & services i.e., engineering & architecture, project management, construction services; electrical, mechanical, civil are all seeing their backlogs increase and have growth potential for the foreseeable future, primarily driven by government spending expectations. Certain areas of technology such as cloud computing, cybersecurity and of course the explosion of artificial intelligence and all its supply chain needs and services. Additionally, logistics, distribution and delivery services, among others.  

But the market overall is quality oriented. Companies in all sectors possessing high organic growth, high gross margins and EBITDA margins in the mid-teens plus operating in a sector with acquisition growth potential is coveted. 

CM: What is the feedback from financial sponsors regarding their sentiment and inclination to engage in transactions in the current economic climate? 

MM: Financial sponsors are eager to make investment bets on new opportunities and lower inventory of companies in their portfolios. The pandemic slowed their liquidity schedules too. So, there is a need to both make new investments and harvest older ones. I’ve stats that indicate over 7,000 PE sponsor-backed companies are in the period for a sale. The institutional LPs need a return of capital from sponsors to seek new funds for their historical LPs.  

CM: How can one optimize the returns from private equity investments in the absence of conventional exit strategies?    

MM: Not my direct expertise but there are a couple of plays. First, if cash flows permitted a significant paydown of debt from the initial purchase, a leveraged dividend to LPs is a tool. Also, if you cannot affect a liquidity event at a valuation that makes economic sense to the owners, grow EBITDA by smaller tuck in valuations funding with company liquidity and or more debt – growth EBITDA. 

CM: To what extent have you observed a shift in the way transactions are carried out in the current market? Have dealmakers become increasingly reliant on technology to streamline the transaction process?  

MM: Deals are taking longer to close. The level of due diligence seems to be getting more detailed and expansive. The sell-side quality of earnings exercises is de rigor. Technology such as AI, we have not seen applications yet, but they will be applied.   

CM: What are your top 3 tips for founders on the M&A process? What are the essential aspects to consider?   

MM: My first tip is assembling a good deal team that is simpatico with the owners/management team.  Your investment banking team is whom you will be interacting with the most.  Pick a group that you believe will be enjoyable working with and will be most committed to getting the job done. Too many times owners pick IBs solely on brand reputation and the size of the transaction might not support the “first team” and you are relegated to junior staff for the deal.  

Second and most important, go to market when the industry is in favor, the company is performing well, i.e., sales up, backlog up, margins at normal levels, and a good deal environment. It’s a tough slog when you are in a defensive mode while marketing the company.  

The deal killers are going to be customer concentration in revenues and rationalizing values on growing gross margins above historical levels. The buyers are not usually excited buying “green bananas” in a company’s business plan. Better to play out the product or service to demonstrate market interest and profitability.