New York, October 23, 2024 – SPS sponsored a webinar on Thursday, October 23rd titled Correcting Course: Emerging Opportunities in 2025 Deal Flow, moderated by David Toll of Private Equity Career Week.
To view a recording of the full webinar, click here. To download the presentation slides, click here.
CEO of SPS Nadim Malik, Brendan Burke of Capstone Partners, Paul Lipson of Fort Point Capital, and Michael Morabito of Houlihan Lokey led a 75-minute discussion on the state of PE deal flow and key factors impacting deal sourcing as we enter 2025.
Analyzing total PE and M&A deal volume, 2024 deal volume is on pace with 2023 levels. Deals completed in the first three quarters of this year are at 75% of deal volume for the full year of 2023. Despite the 16% decline in deal activity year-over-year in 2023, it was still the third most active year since we started tracking the data and well above pre-Covid levels. PE buyers have outpaced corporate buyers so far, having completed 52% of deals in Q1-Q3 2024.
Evaluating quarterly closed deal activity, Q2 deal volume was relatively steady with Q1, and well above Q2 2023 – a positive trend. Once data lag catches up, Q3 deal volume is expected to weigh in at a higher level than last year, suggesting a positive trend YOY for 2024 deal volume provided we see the typical flurry in closed deal activity in the fourth quarter. Looking at the last seven quarters, deal activity seems to have stabilized and started to gradually increase, when compared to the tumultuous roller coaster of deal activity that was 2020 to early 2022.
Examining PE activity only and breaking down the sectors by deal type, Industrials, Business Services, and Financial Services saw the greatest add-on activity relative to other deal types for the first three quarters of 2024, while financing continues to remain an important investment strategy in the Technology sector.
The overall decline in Healthcare PE activity so far in 2024 was driven by a sharp decrease in add-ons. Nonetheless, add-ons comprise the biggest share, if not an outright majority, of all transaction types for most sectors, and are the key contributor behind PE activity representing a higher share vs. corporate buyers of overall M&A activity for the last 3 plus years.
Looking at PE pipeline data, the median number of deals PE firms logged was 181 in Q3 2024, down significantly, over 24%, from the prior quarter. Q3 2024 deal flow was down around 10% compared to Q3 2023, which is a more relevant comparison.
Malik shared a popular trend being seen in both the data, as well as conversations with clients regarding “deal fatigue”, where deal flow is up but quality is poor, and closing rates are down (by 7% in two years to be precise according to a recent analysis from the 2024 Deal Origination Benchmark Report). Time to Close is extending, compared to historical averages. Looking at pre-covid in 2019, in a “normal market”. The time it would take a deal to close, as measured by the number of days between a deal getting logged in PE firms’ pipelines and closing date, was around 210 days. The median went up significantly during the pandemic, only to drop dramatically in the deal rush of 2021, declining to as low as 181 days. Time to Close been at a historical high, around 225 to 230 days, for almost a year and half now.
Malik also shared a teaser of the new SPS 2024 Deal Origination Benchmark Report (DOBR). The report has been published for over a decade and has evolved into an industry standard offering a detailed review on the effectiveness of a PE firm’s deal sourcing strategy. It answers questions such as: Are firms’ origination efforts getting better or worse? Are they top quartile? Do they need to cover more intermediaries? Are they seeing less deal flow than their peers? And of course, how can they better prioritize their time and efforts moving forward?