It’s widely expected that 2023 will weigh in as a relatively weak year for deal volume. Since peaking in Q4 2021, deal activity has gradually declined, taking a significant downturn over the course of 2023. We’re breaking down some of the key deal volume trends that have contributed to this slowdown – and may affect deal activity into 2024.
Closed Deal Volume by the Numbers
According to a late October market analysis from SPS, deal activity for both PE and strategic buyers declined by just under 15% from 2021 to 2022, and is trending toward another 15-20% decline in 2023. Q3 2023 deal activity fell for the fourth consecutive quarter in a row, decreasing 26% year over year from Q3 2022.
Quarterly M&A Deal Activity by Buyer Type
Similarly, SPS’s recent 2023 Deal Origination Benchmark Report (DOBR), which analyzes deal sourcing metrics for sponsors only, found that median closed deal volume for deals with PE buyers and sell-side intermediaries was down 33% year-over-year for the LTM period ending in June 2023. Some specific PE peer groups saw even more dramatic declines, with closed deal volume for the Upper Market group down by 44% over the same period.
The Add-on Trend Continues, But on a Smaller Scale
As market uncertainties have become the norm, firms have pulled back on platform deals and are focusing on smaller deals in the meantime, continuing the add-on trend on a smaller scale. While firms are still completing approximately 2.7 add-ons for every platform deal, according to the 2023 DOBR, add-ons fell by 40% from the 2022 period.
In Difficulty Lies Opportunity
Despite high interest rates and a challenging economic backdrop, firms have continued to close deals throughout the year. Some PE firms have also maintained steady deal flow with investment criteria focused on highly active or economically resilient sectors or verticals.
More than 720 unique intermediaries have sold companies in 2023. Below is a breakdown of the 20 most active intermediaries’ year to date.
Top 20 Sell-Side Intermediaries Q1-Q3 2023
The Road Ahead
While macroeconomic uncertainties have seemed to become a constant, time will give way to confidence on the part of sellers and more deals will come to market. There is a hefty backlog of interesting companies waiting in the wings – and they can’t wait forever.
Jay Jester, Partner at Plexus Capital and panelist on a recent SPS deal sourcing webinar, said of the situation, “That backlog of transactions that will trade and the massive backlog of capital that is ready to do those deals – those elements are there. It’s just a matter of time of enough stability…that we turn the corner and deal activity begins to match the demand and need for capital.”
The M&A community seems to be in agreement. Having waited patiently for market conditions to stabilize and stakeholders to be comfortable to transact, PE firms are ready for a deal activity comeback.