Evening Brief – 06.26.23
Under current macroeconomic conditions such as elevated interest rates and ebbing GDP growth, M&A at the top echelons of corporate finance have slowed. But many may be unaware that the middle market sector of the industry is still seeing a steady flow of activity.
Investment bank Capstone Partners recently published its first quarter Capital Market Update and reported that total middle market M&A volume declined 14.3% year-over-year in the first quarter, resulting from macroeconomic headwinds.
Yet, research revealed that deal activity continued to outperform the larger M&A market, which witnessed a 25.2% year-over-year fall in total volume.
While buyers have become more selective, quality companies with good margin profiles have maintained M&A interest at premium values. According to the analysis, the Federal Reserve’s ability to navigate a soft landing would likely be significant for middle market M&A throughout the remainder of the year.
“As has traditionally been the case, M&A market valuations and activity levels are driven more by credit trends than by equity market levels,” said Phil Seefried, an executive advisor at Capstone. “Tightened credit conditions have decreased the amount of debt available for transactions as well as increasing the cost of that debt.”
While high inflation and interest rates have damped M&A valuations in the middle market, Capstone highlights evidence of gaining upside momentum in early 2023. The average EBITDA multiple amounted to 9.1x in the first quarter, following a decline to 7.2x in the fourth quarter of last year.
Despite a downturn in large-cap mergers and acquisitions, middle-market activity remains robust. The core middle market, those between $100 million and $250 million in enterprise value, has continued to be the benchmark. Valuations in this range have held steady at a 10.9x EBITDA multiple, roughly unchanged from the 2022 average of 11.1x.
“If the U.S. has reached, or is approaching, its trough in the M&A market, there is a precedent for what is to come. Sellers can expect an exuberant interest from buyers looking to reengage in inorganic growth upon a market recovery,” the report said.
Capstone’s investment banking services include M&As, capital and financial advisory, special situations and restructuring.