A few weeks ago, our team attended the DealMAX conference, as we do every year around this time. This conference is the largest annual meeting of M&A market participants in the U.S. Close to 3,000 attendees — investors, investment bankers, deal attorneys and accountants — make this annual pilgrimage. According to conference information, private equity groups in attendance represented over $400 billion in investable capital, a figure that’s reasonable given the number of groups with significant capital we met with over the three-day period.
The growing popularity of this annual event has been amazing and reflects the growth of the deal market and the immense amount of capital that has been raised to facilitate M&A transactions in recent years. In fact, I went back in my files to look at the attendee list from 15 years ago when the conference was called “ACG Intergrowth”— attendance has almost doubled since then. The talk at that time was all about the high valuations of private companies for deals done in the previous year, when the volume of M&A transactions reached a new record. A common theme was the immense amount of capital that would be needed to facilitate increasing deal activity as private company ownership was transitioning from the Baby Boomer generation.
But what we didn’t know back in May 2008 was that the storm clouds of the Great Recession were on the horizon, and four months later Lehman would file for Chapter 11. The M&A market abruptly applied its brakes, hard, as company earnings declined, unemployment grew, bankers laid low and restructuring consultants found themselves busy once again. Private equity groups that were active buyers in the months previous to the Lehman event lamented the high valuations they paid and wondered how they would ever get back to even, much less earn a return, on their investments.
The historical context of this event was especially relevant for this year’s conference. While many of the attendees had probably not yet established their careers in M&A at the time of the Great Recession, many of the discussions we had a few weeks ago were similar to those of 15 years earlier. For the most part, private equity investors said they had not seen much evidence of a slowdown in their portfolio companies. Their companies were primarily healthy and growing. They felt good about their prospects for realizing solid returns on their investments given the activity of strategic buyers and larger private equity groups, not to mention the large pools of capital raised but not yet deployed.
There was much discussion about the rising cost of capital given that interest rates have risen sharply, and lenders were less inclined to supply leverage as aggressively as they had last year when rates were lower and the regional bank crisis was not on anyone’s radar. There was some discussion about investors’ ability to finance acquisition growth with their existing portfolio companies using debt capital rather than equity, and whether banks would use such “add-on” acquisitions as a reason to tighten covenants.
It's clear the acquisition market has settled down a bit from the feverish pace and high valuations of 2022, a seller’s market indeed. However, the consensus is that prospects for shareholders of growing, profitable companies that decide to sell in today’s market will still find an enthusiastic audience of potential buyers.
So, is this market destined to be a repeat performance of what we saw 15 years ago? The fundamentals of today’s M&A market are much more stable than they were back in 2008 and, in the absence of an unanticipated crisis, we expect a steady market. Although the rising cost of capital is an issue, its effect on valuations and deal flow is not yet known. Buyers’ demand for deals will continue to be driven by the massive amount of capital seeking new acquisitions. On the supply side, although private equity groups are disappointed by the less vibrant deal flow of today compared to last year, we don’t anticipate a severe drop in deal volume. There are so many companies that need to be sold. As long as earnings hold steady, the supply of deals will continue. Bottom line, deals need to get done and the capital needed to facilitate those deals is ready and willing.
What does all this mean for shareholders considering a sale now? If the time for a sale is “right” given the company’s financial performance and shareholder objectives, don’t overthink the timing of the transaction. Growing profits may result in higher valuations later but consider the downside operating risks of the business. Recognize the macro risk of M&A market volatility – it can be extensive and changes can be abrupt. The path of M&A is littered with those who tried to call the timing for a deal. Right now, shareholders considering a sale should know that the M&A market remains alive and well.
Contact Jim Lisy at jlisy@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.