New York, January 27, 2023 – SPS sponsored a webinar on Thursday, January 26th titled, Top Strategies for Winning Great Deals in 2023, 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 joined Doug Brookman of Mesirow Financial, Ron Kahn of Lincoln International, and Jack Senneff of Thompson Street Capital Partners for a 75-minute discussion on the latest technology, tracking metrics and marketing tactics top originators are using to beat out the competition in 2023. The panelists covered a review of 2022 deal-making and an industry-by-industry outlook for private equity deal flow in 2023, an assessment of where pricing multiples and leverage multiples have settled, and more.
Malik evaluated the state of the M&A market in Q1 2023, beginning with the boom in annual M&A deal volume seen in 2021, followed by a fall back to pre-pandemic levels in 2022 – declining by just under 20% for the year. Despite this decline, 2022 deal activity weighed in at the second-highest level since tracking the data. 2022 was also the second consecutive year that private equity activity outpaced corporate activity as a proportion of overall M&A deal volume.
On a quarterly level, 2022 deal activity trended downward quarter-over-quarter – a deviation from the upward quarterly trend seen over recent years. According to current SPS data, Q4 2022 was down 40% compared to Q4 2021. (Note: as deals from Q4 continue to be reported, this percentage change will slightly decrease.)
Drilling down to industry trends, Industrials was the most active sector for PE activity, down less than 10% YoY from 2021. Business Services and Technology follow, with the Technology sector seeing the sharpest drop in deal volume.
One factor contributing to PE’s outpacing corporate activity has been the increase in add-ons by PE firms. The trend toward buy-and-builds and rollup strategies seen over recent years accelerated in 2022, with PE firms completing 2.6 add-ons per platform acquisition. Many firms are making a more focused effort in sourcing add-on acquisitions in the lower end of the market, where some of the macro factors affecting funding for those deals are less prominent.
While Q4 2022 median deal flow dropped dramatically from the preceding two quarters, it was actually the highest Q4 on record and was significantly higher than deal flow in Q4 2021. However, this may not necessarily translate to higher closed deal activity in the quarters ahead, and may instead be an indication of stronger business development practices among PE firms, resulting in broader processes and deals showing up in more firms’ pipelines.
Privately held companies continue to represent over 60% of all new platform investments made by private equity firms. There was a sharp increase to 66% in 2022, the highest level on record. PE firms are also exiting more to corporate investors than PE buyers, compared to 2021. This suggests PE firms are not as active on exits as they have been in the past, and selling more to corporate buyers when they are.
Direct-to-sponsor sourcing is becoming a more popular area of focus for PE firms, and will likely continue to be – with just under 6,000 platform investments sitting in portfolios, that were originally acquired by PE firms between 2012-2019. It’s likely that these assets will come to market in the years ahead.
