Challenged by inflation, rising interest rates, and a banking crisis, the M&A market in this year’s first quarter experienced successive waves of what it likes least: uncertainty.
Unlike the global M&A market of 2022, which delivered good performance in the first half and a significant contraction in the second, the first quarter of 2023 delivered a consistent story; market performance, primarily the number of transactions, continued its decline.
But shoots of optimism can be found. First, according to GF Data’s May M&A Reports, valuations on deals completed in the first quarter of 2023 averaged 8.0x Trailing Twelve Months (TTM) adjusted EBITDA, rebounding from the 6.9x average recorded in 4Q 2022.
Second, at McKinsey & Company’s recent M&A conference, co-hosted with Goldman Sachs, more than half of participants polled said they expect to increase their M&A activity. Among the factors bolstering their confidence were shallower valuation declines than in past downturns, and stores of dry powder among public companies and private equity funds exceeding those of the post pandemic M&A boom. Some also pointed to hints of economic recovery or, at least, increasing stability.
Fueling the buyers’ interest in increasing their acquisition activity, according to McKinsey, individual companies and private equity have shown they can deploy highly effective M&A strategies irrespective of market cycles. Decades of McKinsey research shows that companies that pursue a programmatic approach to M&A (meaning they pursue at least two to four small or medium-size acquisitions annually) outperform peers, while companies that only pursued organic growth destroyed value on average. Here are some more on the first quarter’s numbers. According to GF Data’s reported deals:
- Cost of capital was the big story in 1Q, with average pricing on senior debt reaching 8.1% (compared to an average of 6.7% in 4Q), while all-in pricing on subordinated debt surged more than two percentage points to an average of 16.8% compared to an average of 14.5% for all of 2022.
- Debt levels saw a modest pullback on debt across all deals – 0.1x EBITDA decrease in the quarter compared to all of 2022 (3.8x vs. 3.9x) – larger, platform deals were hit hardest; average debt multiple across all platforms ended the quarter at 3.3x YTD vs 3.5x for all of 2022. Private equity groups made up for the lack of senior debt by investing more equity. Average equity contribution on platform deals reached 59.7%, while average senior debt contribution dropped to 29.6% (compared to 56% and 32.4% last year).
In conclusion, we feel we need to see the second quarter numbers (normally available in mid to late August) to determine if a trend is developing. However, we do know that buyers remain very inquisitive (we continue to receive numerous calls and emails from interested groups with capital to spend) and good companies (consistent performers with better than average prospects) remain in high demand and can garner strong values. We are currently seeing this in regards to several of our clients and their desire to transition their company.
If you have an interest in learning more about the M&A market for yourself and/or for the benefit of your clients, please don’t hesitate to contact us. We are glad to have those conversations.
