Moving through the Market: 2024 M&A Trends

Post indication of interest, private equity is digging deep into diligence. By and large, funds are bidding on a smaller percentage of deals, relative to the marketing materials they receive. They are wary of making an acquisition in a market with an uncertain macro outlook.

PE is beginning to see cracks in company performance across the board. When examining their portfolios, they are identifying negative trends from both a demand perspective and input cost, which leads them to be even more skeptical when reviewing new opportunities. This trend overall is preventing deals from coming to market.

While deal volume is up, there is a prevailing sentiment that a smaller percentage of deals are closing due to the overall macroeconomic uncertainty.

Despite these challenges, there remains a cautious optimism, with anticipation building for a resurgence in deal activity as we move into the latter half of 2024 and look toward 2025.

Sector Updates

Enterprise values increased during Q1 2024 from Q4 2023 in business services, consumer, healthcare, industrials, and technology, media and telecom at varying levels, according to the Lincoln Private Market Index. Each sector is experiencing varied trends.

In professional services, companies are leveraging AI to optimize tasks and scale operations, freeing up time for employees to focus on high-level strategy and projects that require the human touch.

• Business Services: EVs in business services increased by 0.9% during Q1 2024, compared to Q4 2023. The utility and infrastructure services subsector, in particular, is set for sustained expansion, propelled by factors transforming the industry. Aging infrastructure, priorities on sustainability and decarbonization, along with tighter regulations, have led to significant demand for infrastructure upkeep, renewal and upgrade. Additionally, utilities in various markets have progressively shifted non-essential functions to external service providers over recent years. In professional services, companies are leveraging AI to optimize tasks and scale operations, freeing up time for employees to focus on high-level strategy and projects that require the human touch.
• Consumer: After a booming 2021, M&A activity has declined, mainly because of waning consumer confidence and spending impacted by high inflation, interest rates and global geopolitical events. Sectors like food and beverage, personal care and pet products are performing well, while durables and discretionary goods face challenges. EVs, however, did increase by 0.2% in Q1 2024 (relative to Q4 2023). Despite lower container shipping costs indicating decreased demand for overseas consumer goods, there’s optimism for an M&A revival amid valuation gaps and deal postponements.
• Healthcare: Healthcare EVs increased by 2.1% in Q1 2024 from Q4 2023, despite heightened regulatory scrutiny and potential election concerns. Although the performance of healthcare companies has been consistent, it’s uncertain whether valuation multiples will start to decrease due to recent scrutiny, potentially leading to a future reduction in EVs. Given the uncertainty in the market, advisors have had to get creative around process strategy, like offering select buyers access to management early on in the preparatory phase of a sale process to get them excited about the company’s story. This helps ensure adequate market receptivity.
• Industrials: Despite a 1.8% rise in industrial EVs in Q1 2024 versus Q4 2023, this sector saw a decline in revenue and EBITDA growth compared with a year ago. Additionally, covenant default rates for industrial companies nearly doubled, indicating a growing gap between high-quality assets and the rest of the sector, with some subsectors possibly under increased strain. Rising input costs are an ongoing challenge due to inflation, and there is a constant chase to match customer pricing with them. Many companies have successfully passed these price increases on to clients, but there has often been a lag. Amid uncertainty, Lincoln observes businesses consistently enhancing operational efficiency, driving sustainable growth and harnessing technological advancements—a positive sign in the current environment.
• Technology, Media and Telecom: The technology, media and telecom (TMT) industry saw a 0.8% increase in EVs during Q1 2024 from Q4 2023. Additionally, TMT M&A activity is showing signs of a slow recovery, with valuations of private tech companies bolstered by the rise in public tech stock values. However, IPO exits remain elusive for all but the largest firms, making smaller TMT companies appealing for PE take-private moves. Despite nearly record levels of PE dry powder, Q1 M&A volume remained steady from Q4 2023, indicating a cautious approach from buyers focusing on growth and profitability, with particular interest in companies exhibiting the “Rule of 40+.” Liquidity for LPs is crucial, with distributions to paid-in capital (DPI) being a key focus, alongside adept portfolio management and leveraging debt markets for recaps as alternatives to full sales.

­­­­­­­­­While challenges persist, the strategic nuances across sectors and burgeoning overall deal volumes hint at a richly complex, yet promising, horizon for M&A as we transition into the second half of 2024 and look toward 2025.

This evolving narrative not only captivates the interest of investors but illuminates a path paved with cautious optimism, strategic ingenuity and a steadfast commitment to realizing the market’s vast potential.

Max Golembo is a v.p. in financial sponsor coverage at investment bank Lincoln International in Chicago. He was featured in Middle Market Growth’s Business Development Professionals to Watch earlier this year.