Evening Brief – 09.07.23
M&A Dealmaking Expected to Rise in Next Six Months
According to a Grant Thornton survey of 150 US-based investment bankers, attorneys, private equity investors and CFOs, M&A dealmaking is expected to pick up again after a long period of subdued activity.
The audit, tax, and advisory business added that those surveyed were also mitigating higher interest rates by investigating alternative funding. At the same time, private equity firms intend to hold assets longer in the belief that valuations will grow over time.
Following the unprecedented surge of transactions in 2021 and early 2022, M&A activity slowed significantly as inflation and interest rates climbed sharply. However, M&A experts are optimistic that deal activity will increase given the modest economic improvements.
The survey revealed that 99% of respondents expect deal volume to increase in the next six months, with 11% expecting a significant bump.
Eric Burgess, Transaction Advisory Services partner for Grant Thornton, said, “people are getting more comfortable with buying in the current climate.”
That sense of comfort comes with some conditions. According to Burgess, PE leaders are finishing more deals. However, the transactions are smaller and involve many portfolio business add-ons that PE firms are bundling in the hopes of delivering greater valuations in the future.
Significant transactions are less prevalent, but buyers can make more minor sales at cheap rates due to solid fundraising with few acquisitions over the last 15 months.
According to the report, the top industries for M&A activity over the next six months are communications, finance and healthcare.
Meanwhile, rising interest rates have made deal financing considerably more onerous; 30% of professionals reported doing fewer deals because of rising interest rates.
Almost two-thirds (66%) have investigated other funding options to fund deals. Some transactions are financed by private funds that invest in minority equity shares, and net asset value financing appears to be gaining favor.
“I’ve seen situations where full equity checks are being written for the first time in over a decade,” Burgess said. “But I think buyers are writing these equity checks in the hopes of refinancing in a year.”
According to the survey results, dealmakers still wonder whether the valuation situation will improve. With over 60% of private equity companies holding onto assets longer due to funding difficulties, the sector will likely endure a “glut of overdue exits.”