Market Update and Predictions: 2024

Business leaders are banking on a market resurgence in 2024. 

Based on the latest Ernst & Young (EY) CEO Outlook Pulse survey, 98% of CEOs anticipate actively engaging in strategic transactions within 12 months, representing a notable increase from the 89% reported in January 2023.* 

If you’re a business owner who wants to sell in 2024, download our Guide to Selling Your Business eBook today.

While the overall market was down, 2023 saw a more resilient middle market when compared to much larger ‘bulge bracket’ M&A deals. We anticipate a much stronger market for solid middle market companies in 2024.

Middle market transaction volume (>$500 million in enterprise value) declined 15.9% year-over-year (YOY) in Q2 versus a 24.8% decrease in total transaction volume across all deal sizes.*

Strategic acquirers have continued to hunt for quality middle-market companies despite this period of slowness. High-performing companies with sustainable cash flows and demonstrated track records will always be attractive to the right strategic buyer despite a less-than-stellar market environment.

Financial buyers were slightly more gun-shy this year with middle market transactions. Still, sponsors seem to be actively evaluating investment opportunities for future acquisitions in this sector, even if they weren’t transacting with the same strength as in the broader market. 

Source: S&P Capital IQ, all values based on publicly available data as of 9/30/2023

Additionally, the average deal value for private equity-backed transactions fell further year over year than deal volume through the first eight months of 2023, indicating that fund managers targeted smaller deals because of the higher leverage cost. 

Morgan Stanley bankers say the rise of private equity in technology dealmaking is just beginning. 

Private equity led 57% of public-to-private technology deals in the first half of 2023—almost double their share of public-to-private technology deals in 2020, 2021, and 2022.*

With significant capital resources, private equity investors are expected to be pivotal in steering M&A activities. Their influence and presence in the market are likely to persist, shaping the landscape of mergers and acquisitions in the years to come. 

Source: S&P Capital IQ, all values based on publicly available data as of 9/30/2023

Note: M&A excludes private placements, MM defined as transwactions with either value or revenue between $10 and $500M and therefore does not include transactions excluding this information. All deal-related figures exclude real estate deals.

The unfavorable interest rate situation uniquely positions companies in the lower middle market to both larger strategic and financial buyers, as there is less risk than an expensive transaction involving a high amount of financing.

Expect more structures to bridge the gap between seller/buyer expectations – earnout structures, offering equity in the new or merged entity, or rollover equity.

Average multiples in the lower middle market (between $10-$100 million in enterprise value) fell to 8.2x EV/EBITDA in Q2 from 9.6x in 2022, while the overall average fell from 9.6x from 10.9x. However, the broader market recorded deeper YOY declines compared to the lower middle market.

2023 saw buyers moving down-market to pursue smaller deal sizes during periods of elevated interest rates.

Global private equity dry powder at midyear FY23 stood at a record $2.49 trillion, up more than 11% since the close of 2022, as uncertain environments resulted in a pause in acquisitions for some.

In other words, there is significant cash available for sponsors to make investments in 2024 if the Private Equity sphere does indeed use these funds for acquisitions.

Middle market deal activity has continually proven its ability to endure, as most business owners in this sector do not often have the option to wait out market turbulence.

If you’re a business owner who wants to sell in 2024, download our Guide to Selling Your Business eBook today.

*Sources: Foley & Lardner, LLP, published 10/31/2023 . Morgan Stanley, published 8/29/23

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