ACG Chicago’s First 2024 Event Dives into Predictions for the Year
Investors and bankers speaking at ACG Chicago’s Market Trends breakfast in January admitted market conditions were still challenging, but there are a number of tailwinds propelling M&A
Despite the discussion often veering into “doom & gloom” territory, panelists at ACG Chicago’s Market Trends breakfast in January noted there were multiple positive signs suggesting M&A should improve this year.
Here are some of the key takeaways from the panel:
Valuations appear to be holding up because it’s only the “A assets” that are trading. “I think the deals that were getting done [in 2023] were really the A assets. They’ll continue to get done in 2024. If it was a B asset, some of them were trading at much lower values—call it half a turn to a turn in a half lower than what they’d naturally trade for or they just didn’t get done for a variety of reasons,” said Phil Bronsteatter, managing director at Pfingsten Partners.
Speakers suggested that data on valuation multiples will start to come down as the market thaws and more B- and C-rated assets arrive at auctions.
ACG Event Recap
WHAT: ACG Chicago’s Market Trends panel
WHERE: The Metropolitan Club, Chicago, IL
WHEN: Jan. 25, 2024
THE TAKEAWAY: After a challenging and slow year for M&A, experts shed light on some of the signs pointing to a more active market in 2024.
“There’s this bifurcation in the market, where you have those quality best-in-class, A+ caliber businesses that are trading and they have these headline valuation multiples that leave people scratching their heads,” added Larissa Rozycki, managing director at Harris Williams.
While 2023 continued to be slow throughout, there were signs of improvement in the fourth quarter. Heath Fuller, senior managing director at private credit firm NXT Capital, said the number of deals the firm passed on declined in Q4. “Our turndown rate in the first quarter of last year was 66%, in terms of the opportunities we were seeing. That’s far above our historical norm. That improved throughout the year. So in the fourth quarter, it was down to 43%, which is more in line with our historical average,” Fuller said.
Investors continue to come up with creative ways to close deals in a slow market, with many employing earnouts, seller notes and minority stakes to get deals across the finish line. “There are a lot more earnouts and we haven’t seen that in a long time. I think you probably saw 20-30% of deals that got done last year include earnouts. I think the earnout is significant and helps with business sustainability,” said Bronsteatter.
There are a lot more earnouts and we haven’t seen that in a long time. I think you probably saw 20-30% of deals that got done last year include earnouts. I think the earnout is significant and helps with business sustainability.
Phil Bronsteatter
Pfingsten Partners
Showing exits and returns to LPs is the best way to go about fundraising. “If you can send a distribution notice, call your top LPs and say, ‘hey, we just had this big exit, it returned x percent of the fund and we’re ready to start raising,’ that’s the best way to engage in a conversation about launching a new fund,” said Kevin Butts, senior VP in the private equity group of 50 South Capital Advisors.
The momentum for sales of founder-owned businesses is still there and growing. “If you look at the data, there is something like two million privately held businesses that have 25-1000 employees and 60-65% of them are owned by individuals who are older than 65 years old,” said Butts. “Just think about the demographic momentum there. These businesses will have to continue to go through that institutional transition. The place that pops out the most is in the data on the number of add-on acquisitions that were done per year.,” Butts added, highlighting that 75-80% of private equity deals in North America last year were add-ons compared to 35-40% 10 years ago.
The presidential election might not play a big role in M&A after all. Elections years are often cited as a factor moving dealmaking in one direction or the other, but speakers said that data doesn’t actually bear that out. “From a data perspective, I think there’s probably a bit of a misconception that there is a significant effect on election years in terms of M&A activity and that actually proves not to be the case, which I think is a pretty interesting,” said Rozycki. She noted an exception could be a big shift to one party, which hasn’t materialized lately in the U.S. “If you see a significant push in one partisan direction, where you get the presidency and both legislative bodies, and one party that can unilaterally move things, that might have more of an effect than anything else. But as we all know from what we see in Washington, there is a lack of movement in any direction.”
Anastasia Donde is Middle Market Growth’s senior editor.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
