Sponsors Bid Defiance to Deal Slowdown, Predict Strong 2023

The M&A market may have peaked, but buyout firms seemed determined to enjoy the view for a while before heading back down to base camp. They may even seek bigger mountains to climb.

Forty-five percent of private equity professionals in a recent poll said they expected to consummate as many platform deals in 2023 as they did this year. Nearly a third, or 30 percent, expected to do more, while a quarter, or 26 percent expected do fewer.

Respondents expressed even more optimism when it comes to add-on acquisitions. Nearly half, or 49 percent, expected to do more add-ons in 2023 than they did last year. Almost all the rest, 47 percent, expected to do about the same number. Just 4 percent expected to do fewer.

The poll took place during an October 27 webinar titled “What Top Originators Predict for 2023.” During the program, sponsored by deal sourcing platform provider SPS by Bain & Co, speakers from a deal sponsor, two investment banks, and SPS by Bain & Co held forth on what the next year has in store.

Nadim Malik, founder and CEO of SPS by Bain & Co, unveiled statistics showing a market that’s taking a breather after a burst of deals in 2021. Overall North American deal volume through the third quarter, at 7,501 deals, fell 12 percent from the comparable period last year. Deal volume has fallen for three successive quarters, Malik observed.

Private equity firms, meantime, closed 3,875 in the first three quarters of 2022. That was off 13 percent from the prior year. Still, they closed more deals in the third quarter than they did in the third quarter of 2019. That was just before the pandemic struck. And private equity firms continued to outpace strategic investors in the third quarter, something they did for the first time only recently. “I wonder if that’s a trend that’s here to stay,” said Malik.

Looking ahead, Malik observed that the market is sending mixed signals—much like the larger economy is doing. “Employment looks great. Growth isn’t bad,” said Malik. “But what about inflation? What about high interest rates? Is there [going to be] a recession? How long will it last? How bad will it be?” He added: “No one knows which way it’s going to go.”

Fellow panelist Michelle Eidson, principal and head of business development at Crest Rock Partners, a Denver-based lower-middle-market firm focused on software, technology, business services, industrials and manufacturing, said that deal flow has returned to a pre-pandemic-like pace after a “tidal wave” struck in 2021 and first half of 2022.

Although anticipating a recession in 2023, Eidson said she expects the first quarter of the year to be “pretty active” for deals. She points to a private equity industry that still has plenty of capital which needs to be deployed. And she anticipates sellers moving off the sidelines once they see some stability in the credit markets, even if valuations are off from recent peaks.

Isaiah Knouff, the Nashville, Tennessee-based managing director in the financial sponsors group at Canaccord Genuity, agreed that many transactions have been put on hold, as companies grapple with supply chain issues, inflationary pressures, higher interest rates and other challenges. Should those issues ease it would create “robust first quarter activity for 2023.” As for the remainder of 2023, he added: “I think it will be very much a TBD, in terms of what happens.”

And what sectors are heating up as we head into the new year? Michael Butler, chairman and CEO of Seattle-based investment bank Cascadia Capital, pointed to food ingredients, food contract manufacturing and HVAC services as particularly strong.

Butler said that his firm’s biggest practice this year would be agriculture. “If you look historically, agriculture is a good hedge against inflation,” he said. “From growers to packers to shippers we’re seeing robust activity.”

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