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Overheard at DealMax: PE-led M&A on standby until 2024

Illustration of two hands shaking with sleeves made from calculators.

Illustration: Annelise Capossela/Axios

"Normal" private equity-driven deal activity isn't likely to resume until 2024, according to dealmakers at DealMax.

Why it matters: As the market continues to recover, unique deal structures and bidding with conviction will go a long way.

What they're saying: "The backlog keeps growing and sentiment towards more normal activity is pushed to 2024," said one director at a PE midmarket firm.

  • "First it was Q2 — and now I am hearing and thinking post-Labor Day. So realistically Q4 of this year and 2024 are when people are eyeing."
  • "We are very optimistic about next year," the director added. "It has to be a booming year, with all the dry powder, exit needs and backlog of processes."

Yes, but: Potential buyers are "pushing the envelope in terms of what they will pay to get a transaction done," said a consultant.

  • A successful deal requires working backward, the consultant added.
  • Buyers should be asking: "What was the catalyst for the transaction? What is important to the seller? You have to know your audience," he said.

Of note: Discussing the 2023 M&A outlook, panelists were speaking under Chatham House Rules.

By the numbers: In Q1, price points rebounded. For deals with enterprise value between $10 million-$25 million, the average price point was 8.1x up from 6.9x Q4 in 2022.

  • The lower middle market has been active this year, with an increase in deals sub-$50 million
  • Unsurprisingly, cost of capital increased, inching up 1.5% for senior debt.

Yes, but (again): The average equity is 63% per deal, showing "the industry is resilient and can and will work through these somewhat short-lived tough times," said one managing director of a data company.

The big picture: Financing has been a major blockade for PE deals, made worse by the banking crisis.

  • Sponsors are now relying on private credit direct lending for financing needs, one private equity consultant said.

The bottom line: “The words stability and regional banks can not be in the same sentence anymore today," said the investment banker.

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