A Glimpse Into 2024
As we embark on 2024, our global team offers their personal insights into the outlook for M&A and Private Equity across our sectors.
A view on North America by Wilma Jordan
From a North America market perspective, I am optimistic that M&A activity will increase in 2024. Three factors contribute to this outlook.
Firstly, the accumulated dry powder among private equity firms in the US has surged from $2.39tn to a record $2.59tn over the past 12 months and many private equity clients are actively speaking to us about how they can deploy this both in traditional processes, and more creatively. Expect to see funds focusing more than ever on carve-out opportunities and asset combinations where they can create opportunities to invest outside of banker-led processes.
Secondly, given the challenging M&A market over the last 12 months, many U.S. private equity firms have portfolio companies that have exceeded their optimal holding period. In other terms, companies lingering in private equity portfolios for more than 5 years will need to be sold, as the time value of money diminishes with each passing year and pressure grows from LPs to return funds.
Lastly, assuming that the Fed is on track to start lowering interest rates in 2024, the cost of capital will decline with these reduced rates and the markets are currently pricing in a reduction of 50 – 100bps. We expect this to motivate buyers to adopt a more assertive approach in acquisitions as well as give sellers the confidence they need to take their companies to market at attractive values.
The US economy has remained stronger than many European economies, and US strategic buyers remain focused on acquiring growth both domestically and internationally. We predict that European based private equity owned companies will increasingly look to the US for buyers and investors, both as tuck-ins to existing platforms or as potential platforms in their own right.
All these dynamics will make for a more stable M&A environment that will engender confidence for buyers and sellers.
The US economy has remained stronger than many European economies, and US strategic buyers remain focused on acquiring growth both domestically and internationally.
A view on the UK by Richard Vaughan
From a UK market perspective, I feel far more upbeat going into 2024 than I did going into 2023. While the outlook for the UK economy for 2024 is mixed, we are entering a period of greater certainty in the markets which, absent any new shocks, will drive opportunity for dealmakers.
Several of the key economic indicators look better than they have at any point in the last 12 months, with headline inflation down from over 10% to under 4% today and forecast to return to more “normal” levels by the end of the year. The markets are pricing in a reduction in interest rates of over 100bps and importantly consumer sentiment appears to have turned a corner as real income levels begin to improve.
This macro-sentiment reflects what we are hearing from companies across our sectors – 2023 was hard work for the majority and really a question of managing through, 2024 is about a return to growth.
From an M&A perspective we are seeing a growing pipeline of opportunities which should come to market during the year, across both private equity and founder owned businesses. Pitch activity was higher in Q4 than at any other point last year albeit in terms of timing, it feels like most businesses will be waiting to see how 2023 closed out, and what visibility looks like on 2024 before they push the button on going to market. Everyone is aware that 2024 won’t be 2021, the bar is higher and hence every transaction will get an increased level of scrutiny from buyers and investors alike, so vendors and their advisors will be keen to ensure that all boxes are ticked – financial, commercial, and strategic – in advance of engaging in a process.
Despite the challenges of the last 12 to 18 months, the UK digital economy and ecosystem is as strong and vital as ever – continuing to grow, innovate and evolve at an exciting pace and constantly creating new ideas and opportunities, which in turn should make for a return of a vibrant M&A market in due course.
While the outlook for the UK economy for 2024 is mixed, we are entering a period of greater certainty in the markets which, absent any new shocks, will drive opportunity for dealmakers.
A view on Private Equity by Marcus Anselm
2023 was clearly a challenging year for private equity across EMEA: a difficult economic environment combining high inflation, high interest rates and recessionary worries; broader macro concerns around geo-political instability and the impact of Gen AI; a dearth of top quartile assets choosing to come to market; and mis-matched buyer and seller price expectations. Given all this, it was no surprise that the number of European private equity deals across our sectors fell by 32% versus 2022, with the more leverage-reliant mid and upper market feeling the squeeze in particular.
Looking into 2024, we’d certainly hope that private equity related M&A will pick up.
On the sell-side, buy-out groups globally have a record $2.8tn in unsold investments, and GPs are under increasing pressure to start returning a flow of capital to LPs, not least in the context of a tough fundraising environment. Funds need to find a way to start exiting old investments over 2024 and they will likely become more creative about how they do this where needed. We are increasingly hearing more about private equity funds being open to structured transactions including deferred components and reinvestments to get deals closed in a way that they would not have contemplated in 2021.
On the buy-side, while everyone has talked about dry-powder for years now, it remains incredibly relevant. European private equity firms are sitting on a record €350bn of cash reserves, and although some of this can and has been deployed into existing companies or through continuation funds, ultimately both LPs and GPs need to see this being invested into new platforms. The broader economic and M&A environment should help achieve this in 2024 – inflation has dropped sharply across the region, interest rates are expected to fall through 2024, recessionary concerns are easing at an IC level and buyer-seller pricing expectations are beginning to align.
Of course, timing on this is hard to call but we would hope that these factors will drive markedly higher private equity related M&A by the end of Q2.
It was no surprise that the number of European private equity deals across our sectors fell by 32% versus 2022, with the more leverage-reliant mid and upper market feeling the squeeze in particular.
A view on Venture Capital by San Datta
Many in the start-up and venture capital community will be glad to see the back of 2023.
While some companies across our sectors continued to deliver truly impressive growth and/or profitability, for many it was a hard year with founders and entrepreneurs needing to focus much more on scalability, unit economics, GTM efficiency and cash break-even vs. topline growth, with the difficult cost-restructuring decisions that often came along with this.
Similarly, many investors were left looking hard at their in-prices and capital structures vs current asset valuations.
Looking forward, it feels like 2024 is going to be a year of re-alignment.
From an operational perspective, a lot of the really hard work has been delivered so companies are better aligned for the current environment. That may not mean a return to the 2021 and 2022 growth rates, but it does mean much more achievable, capital efficient and sustainable growth through 2024 albeit at a slightly slower pace.
From an M&A perspective, we definitely expect an uptick in M&A across the VC market over 2024 for several reasons. Firstly, we are already seeing much closer alignment around pricing between buyers and sellers, and we expect that alignment to get closer over the coming months. Secondly, strategics are back at the table, particularly in North America, as public market tech valuations have continued to strengthen in recent months. And lastly, many founder and VC backed companies are now looking at being part of a larger strategic in a more positive way than they would have done a couple of years ago – there are potentially huge synergy opportunities for independent businesses with the right larger partner, and an increasing number of independents are keen to explore these.
While some companies across our sectors continued to deliver truly impressive growth and/or profitability, for many it was a hard year.
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