US M&A Market Driving Strong Momentum And Opportunity Activity Through Private Equity Adaptability

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HFA Staff
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Private Equity

DC Advisory, the FTSE 250 international investment bank and subsidiary of Daiwa Securities, today releases its latest US Private Equity Mid-Market Monitor. From DC, key highlights of the report include:

Private Equity Adaptability

  • Private equity’s willingness to welcome innovation and new opportunities are significant
  • The US economy recovered in the second half of 2023: an anticipated soft landing in the months ahead led by disinflation, stronger than expected GDP growth of 1.6%, a robust job market, and the potential for a string of interest rate cuts sending stocks and bonds rallying into the end of December

Adjusting to the ‘new normal’ of M&A activity

  • The stock market is expected to be a good indicator of M&A volumes, currently the market is up which is a positive indicator
  • M&A has been moving along at a relatively solid pace, and this momentum should carry through the year. With high inflation and market instability, private equity firms must possess strength and flexibility with an openness to evolving trends
  • Many private equity firms are sitting on a substantial amount of dry powder, ready to deploy capital into promising opportunities as market dynamics evolve

Diversification & digitization

  • Diversification has been central to achieving an increase in take-privates and corporate carve-outs, with new market expansions and secondary deals gaining a more prominent focus in deal strategies
  • Digitization, in our view, will be a key driver for deals as businesses incorporate technology into their industries through acquisition

What you need to know

  • 2023 US private equity market volumes approached pre-pandemic lows, in 2024 we expect volumes to stabilize as the year progresses
  • In Q2 2024, there have been indications of building market momentum for Q3 2024
  • Pressure on private equity funds to return capital to LPs is increasing, driving more active consideration of inbound interest at current asset value levels
  • Interest rates have stabilized at ‘higher for longer’ putting downward pressure on valuations, while the availability of credit at improved terms has helped bridge the valuation gap in the current marketplace
  • Fortunately, the economic backdrop has remained strong for most private equityowned businesses
  • Valuation gaps and supply demand imbalances remain, making broad auctions risky to undertake. However, pre-sale process “price discovery” has become standard leading to a less traditional auction process and corporate transactions gaining an increasing share of the overall market

Advisory-led processes continue to adapt:

  • Increasing solicitation and acceptance of “preemptive” transactions from corporates before processes begin
  • Continued aggressive activity from financial backed strategics is limiting sponsor platform participation in sell-side processes
  • Many current processes do not progress past the initial exploration phase before going “broader” to a group of sponsors
  • Even for “broader” processes, a limited number of PEs are being included in buyers list
  • During the past 2+ “down” years, a significant amount of deal preparation and analysis has been completed and funds have assets ready to sell to bona fide, qualified targeted approaches
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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.