LA Times | Insights on the Private Equity and M&A Landscape

Oct 2024

Originally posted by the LA Times on October 28, 2024.

Michael Piric, Managing Director in Lincoln’s Financial Sponsors Group, noted that deal flow didn’t reach anticipated levels by the end of Q3, and that trend is expected to continue in Q4.

“At Lincoln, we anticipate that transactions closing and lower interest rates will stimulate increased deal flow in 2025. “Deals beget deals,” underscoring sellers’ preference for valuation proof points over price discovery,” Michael said. “Without deal closures, comparable transactions are lacking, complicating sellers’ adaptation to new market conditions. Successful deal closures will encourage sellers to bring their deals to market. Additionally, further interest rate cuts by the Fed are anticipated to positively influence valuations and market sentiment, fostering the belief that the market downturn is behind us and acceleration is imminent.”

In terms of M&A activity, Michael noted that it is expected to grow over the next five years due to pent-up demand from reduced activity between 2022 and 2024; private equity (PE) firms with portfolio companies ready for sale; businesses pursuing inorganic growth to boost profits and achieve transformation goals; pressure on companies to advance digitization and future-proof their business models, alongside favorable economic conditions.

The anticipated reduction in interest rates, following the Federal Reserve’s half-point cut in September, is expected to increase deal activity and benefit PE, Michael said. Lower interest rates decrease borrowing costs, making leveraged buyouts more appealing and accessible. This fosters more transactions and can lead to better valuations. Additionally, there is intense competition for premier deals.

“Private equity firms are sitting on record levels of dry powder, escalating competition and valuations for premium assets,” Michael commented. “This trend is likely to persist as PE firms maintain a high standard on the buy side, focusing on businesses with strong fundamentals, growth potential and resilient cash flows.”

For challenges to be aware of, Michael noted that sponsors are in agreement that a post-Labor Day surge didn’t happen as expected.

“With the slower M&A market, PE has primarily been focused internally, spending considerable time on portfolio company improvements and add-ons to ensure they will achieve the highest return when the market conditions strengthen,” he said.

View additional insights in the original article.