Middle Market Resilience Amidst Global Slowdown
Global M&A performance during 1H 2023 was varied due, in part, to two factors significantly impacting economic growth and spending: inflated interest rates and large stockpiles of cash yet to be invested by corporations and financial sponsors. Deal activity in 2Q 2023 was on par with historically low records and almost surpassed the record low in deal volume at 2,944 (2Q 2020 recorded 2,206 closed deals amidst the pandemic). Similarly, dollar value is down 33.7% on the year, producing disparate data within the M&A landscape¹.
Cumulatively, 1H 2023 deal activity equated to $1.3 trillion, the second lowest deal volume in the last 10 years². YoY deal value declined by 34.9% from 2Q 2022 with no indication of increasing growth potential. The trajectory of deal activity is subject to numerous variables, both within and outside of the United States; Variables include monetary policies from central banks in the US and Europe, interest rate hikes by the Fed, and a shift toward anticipated policy easement. Historically, these select variables affected reported deal activity in H1 2023 but will continue as determinants for H2 2023 performance³.
Most recessionary concerns are postponed until early 2024, but macroeconomic projections from Strategas, a market research subsidiary of Baird, are forecasting meager US GDP growth though Q2 2024 and an additional negative real GDP rate in 1Q 2024.
Varied views on valuation between buyers and sellers have continued to exacerbate transaction timelines for drawn out negotiations and lower deal sizes. Higher costs of capital may continue to drive delays within the valuation landscape with the frozen IPO market offering a stark contrast between private and public valuation capabilities. Private business is expected to remain more resilient through the valuation downturn, though decreases are still expected.
North American M&A Activity¹
by Quarter
European M&A Activity¹
by Quarter
Global M&A Value¹
Multiples For All M&A Transactions¹
by Form of Payment
North America & Europe
Middle Market Resilience
While global merger and acquisition (M&A) activity floundered significantly following the post-pandemic resurgence, middle market deal volume remained vibrant across sectors. Increased selectivity from buyers commanded M&A interest at premium levels. As inflation and higher interest rates are also affecting the middle market, there is evidence of upward pricing momentum. The average EBITDA multiple for middle market transactions was a reported 9.1x in 1Q 2023, following a decline from 7.2x in 4Q 2022⁴. Following the surge in 1H 2023 activity, sellers can expect to see greater interest from buyers looking to reengage in acquisition strategies upon market recovery. Timing will remain key as an influx of transactions may cause a decrease in average EBITDA multiples.
Source: (1) Pitchbook, (2) Bloomberg, (3) Baird, (4) Private Equity Professional