“I’ll be surprised if it’s not a better year than 2023”

It is estimated that the total of global equity dry powder has hit $4tn according to BlackRock’s Private Markets Outlook after another relatively quiet year. So, what can we expect to happen in 2024?

Marcus Shah, a Partner specialising in Private Equity within our Interim Management, Finance Practice, speaks to Simon Hill, an experienced Partner at Liberty Corporate Finance about his insights into the current state of PE, and what lies ahead in the coming months.

Marcus Shah: Simon, when we spoke a year ago there was a sense that the capital would begin to flow again towards the end of 2023. What happened?

Simon Hill: It wasn’t quite the year people had hoped for. There were various macro events, such as the ongoing war in Ukraine and recent conflicts across the Middle East, and then interest rates and inflation. With this general backdrop of uncertainty, I think many funds again spent much of the year sitting on their hands waiting for markets to kick back to life. Ultimately, it didn’t feel as if anyone was trying to break the cycle and be the one to set the market back on track. People were feeling a bit flat coming out of 2022, and that mood just carried on into 2023.

However, towards the tail end of the year there was a sense that, while interest rates and inflation weren’t fixed, they were on the right trajectory. There is plenty of money ready to go and there was a feeling in Q4 that there were some green shoots of activity coming through.

Now we’re in 2024 and there’s a definite sense that more things will come to market. Speaking with the M&A bankers and diligence providers in the early weeks of this year, they’re all pretty busy, with a good volume of businesses being prepped. The workflow of these diligence teams could be seen as the canary in the coalmine, an early indicator of how busy people will be in the months ahead.

MS: Could the market be influenced by the fact that 2024 is a General Election year in the UK?

SH: Hopefully less than you might think. If you had a Conservative Government led by Liz Truss and a Labour Party led by Jeremy Corbyn, you’d be going into an election with two quite extreme bookends of potential outcomes. I’m not sure there’s as much difference between Rishi Sunak and Sir Keir Starmer’s thinking and the likely impact on market disturbance. Many people I talk to are thinking they will go ahead with their plans anyway.

Perhaps if I was an institutional buyer, spending someone else’s money, I wouldn’t want to be committing to write out a big cheque on a deal two weeks before a General Election. That feels a bit brave. But it doesn’t look like we are going to get another Liz Truss-style economic hand grenade so any pause in activity may be (hopefully) fairly brief.

Assuming the timing of the election that we all expect in late Autumn, I think there will be quite a lot of activity in the first half of the year, although that’s partly also because of the lack of activity last year. We are working on a good number of projects that are due to launch in February, but anecdotally that may be more a hangover from last year rather than a stand-alone Q1 spike.

MS: Surely, the timing of deals will be crucial this year?

SH: Yes, it will be. The weight of money has built up, and there are many people sitting around waiting for the market to get going. Also, many of the deals done during 2021 will be getting near to their natural PE exit timeline, hitting their four-year hold point in 2025.

If you assume that 2025 is going to be a stronger year, the smart buyers might decide not to wait until then, because you could find yourself in a super-competitive auction.

You could imagine many investors doing their own prep/targeting work, waiting to see the result of the election – which looks like it will be in November – then knocking hard on the door and seeing if they can get the deal over the line before Christmas. And those sellers might prefer a swift deal at the end of 2024, rather than wait for 2025, when there could be lots of auction processes launched and competition for investor attention could be challenging.

MS: Do you feel the mid-market has any reliance on large cap to shift the dial?

SH: There is always a degree of overlap of course, but in many ways, I think they’re relatively independent. The large cap market has dried up over the last 18-24 months but in the mid-market, while it’s not exactly a flurry of deals, it’s always moving along – and the right assets are still being bought and sold at fairly punchy prices.

MS: Assuming nothing comes out of left field, what are you expecting of mid-market PE, in the year ahead? Are there any particular sectors to watch for?

SH: It’s still hard work to do deals in industrial or retail and in much of consumer. You can expect plenty of activity in stalwart sectors such as financial services, tech and healthcare, and I think leisure will reappear within consumer. There are plenty of travel businesses prepping for sale, for instance. But pure retail is tough. I do think 2024 will be a better year for mid-market PE.

There might be a timing quirk depending on the election – although, as I say, many people may carry on regardless while others might use it as an opportunity to either go late or go early. Overall, though, I’ll be surprised if it’s not a better year than 2023.

MS: What advice would you give to management teams considering an exit over the course of this year?

SH: If you take the assumption that, with all of that dry powder, and a sense that people are starting to come back into the market with a bit more vigour, I suspect the wait for people who have been thinking of an exit is coming to an end.

If you are in that position, it’s time to do all the housekeeping you need to do. Make sure the business is ready to be sold. Do your prep because, if the market does come back with a vengeance, you don’t want to be caught out by not being ready.

Frankly, none of this is rocket science. If a manager in a business has an objective to step off at the exit and not roll through again, make sure you’ve got your succession planning in place. You can’t find a successor when you are midway through the exit process.

Also, if you have reserved pots of sweet equity, don’t leave them on the shelf. Don’t be left with unallocated equity. Allocate it now, because your exit horizon is hopefully now becoming less hazy, you could easily be on the transaction runway in the next 12-18 months.

Having the right team in place is crucial too. If you are trying to prep data and all the things the sale advisor and diligence provider want you to get ready, and your team isn’t up to scratch, that’s a recipe for disaster.

Many thanks to Simon for joining me for such an illuminating discussion. If you want to discuss permanent or interim hires for your finance team, please get in touch.

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