M&A activity fell to a ten-year low in 2023 as soaring borrowing costs and economic headwinds took their toll. Will 2024 see purse strings loosen and deal-flow bounce back, or will uncertainty persist? Steve Clarke, Partner in Eton Bridge Partners’ Finance Practice, specialising in supporting businesses to deliver M&A projects, takes a look at what this year may bring.

Record dry powder is driving deal appetite

The dip in M&A activity in the past two years has left cash sitting on the sidelines. Private equity, venture capital investors and government sovereign wealth funds are boasting healthy balance sheets and are flush with capital. With private equity primed for a spending spree, listed companies could find willing buyers for carve-outs, generating revenue to drive new growth areas. According to BlackRock’s 2024 Private Markets Outlook, dry powder – capital that’s available to fund managers for investment – has hit $4tn. That’s a record, and it suggests there is a vast amount of M&A firepower ready to deploy if the conditions are right.

Stable debt markets make deals more likely

So what will it take to unleash this war chest and drive deal activity back to pre-2022 levels? More stability in the debt market will certainly help. A spike in borrowing costs last year spooked dealmakers and led to a reassessment of company valuations. As we head into 2024, there are signs of a stabilisation in interest rates. That should help drive a return of confidence as dealmakers can predict returns with more certainty.

More realistic valuations should boost transaction flow

A mismatch between buyers’ and sellers’ price expectations was one of the factors behind the lull in M&A over the last two years. With market conditions and debt markets now stabilising, valuations are clearer, and buyer and seller expectations are converging. That clarity should help drive transaction volumes as deals that have been on ice due to valuation wrangles move past the negotiating table. Boston Consulting Group’s (BCG) recent M&A Report noted that deal multiples have pulled back from their 2022 peak saying, ‘we expect the gap between sellers’ and buyers’ expectations to continue to narrow over the next few months.’

Green deals, digitisation and the imminent UK election could boost activity

BCG sees ‘green dealmaking’ as a big driver as companies acquire capabilities in decarbonization, energy transition, clean tech and the circular economy. Digitisation is another push factor as businesses seek to boost their technological competitive advantage.

Sellers of businesses meanwhile, may be keen to get deals done before the UK’s general election later this year. If Labour wins as many pundits predict, then more punitive capital gains tax rules will apply to proceeds from the sale of businesses. That could bring deals forward and provide a near-term boost to the M&A market.

Some uncertainty remains amid geopolitical tensions

So can anything derail this rosy picture for M&A? If the last few years have taught us anything, it is that the future is hard to predict. As we head into 2024, we are facing turbulence in the Middle East, continued war in Ukraine and rising tension between China and Taiwan.

‘Wars are still raging on multiple frontiers that have the potential to deliver further commodity price shocks through the global economy,’ comments J.P. Morgan in its 2024 Investment Outlook. The UK and US elections also have the potential to throw a few curveballs.

But the early indicators still suggest a rebound is on the cards. Anecdotal evidence is pointing to a pick-up in activity with data room providers – secure spaces to share and process M&A documentation – seeing one of the busiest Decembers on record. That bodes well for a strong start to 2024.

What does the right M&A team look like?

With an uptick in transaction activity, business leaders may be considering how to get the right resource in place. Hiring an in-house Corporate Development/M&A professional to work alongside external agents such as investment banks and the Big Four could be a sound move. An in-house M&A professional works closely with all parties to drive value and is focused solely on achieving the best outcome for the business.

These industry specialists have extensive hands-on experience in transaction delivery and act as an in-house transaction leader, 100% focused on driving positive outcomes for the company they are brought into. They can bring cost efficiencies through ensuring suppliers are providing the best value and a typical M&A specialist will have twice the amount of practical experience in years than an equivalent Big Four professional at roughly one third the cost. Interim Corporate Development/ M&A professionals can provide short, medium, long-term structured or ad-hoc support with full knowledge transfer post-acquisition and beyond, and can be deployed in as little as two days.

Steve has extensive experience in sourcing interim Corporate Development/ M&A professionals from investment banking, consulting or transaction services backgrounds. His client base spans FTSE and AIM listed, private equity backed, and privately owned companies. Please do get in touch if you would like to discuss your requirements.