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PE dealmakers temper 2024 M&A expectations

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Illustration: Annelise Capossela/Axios

Large private equity firms were initially bullish on a 2024 market rebound — but they've since tempered their expectations, several dealmakers tell Richard.

Why it matters: There's a backlog of deals sitting in the pipeline that may have to wait, perhaps up to another year, to come to market.

The big picture: The dimming prospect of imminent interest rate cuts combined with a looming government shutdown will yield a year of volatility — with narrow windows in which to transact.

  • "I think a lot of optimism was unfounded," says Solomon managing director Cathy Leonhardt.
  • "I think when you talk to most folks in private equity now, they'll say that the deal activity in the first half is going to be much weaker than they expected," she adds.

Zoom in: Permira partner David Erlong says his firm is keeping a close eye on a fragile consumer balance sheet, including an overall reduction in excess savings.

  • "We're seeing early signs of softness in consumer discretionary," he says.

Zoom out: National elections in 60-plus economies, headlined by the U.S., are happening this year, adding volatility, Erlong says.

  • A government shutdown would halt the Federal Trade Commission's accepting and processing HSR forms, and that would delay deals until it reopens.
  • A disruption in government paychecks could exacerbate potential early signs of a fragile consumer.

By the numbers: The debt financing window is open with spreads tightening, evidenced by the number of re-financings and dividend recaps, Erlong says.

  • It costs around SOFR plus 500 basis points, or an interest rate of about 10%, to service debt along with covenants, says David Tayeh, head of private equity at Investcorp.

Yes, but: Banks aren't willing to provide fully committed syndicated financing because the liability remains too risky, sources say.

  • Plus, uncertainty around public market stability remains. IPO activity continues to normalize from 2021 and the sector has yet to see a blockbuster listing this year.

What they're saying: "While the market is not blowing and going, it's not terrible," Tayeh says.

  • "If you want to bring a company to market, you have to wait until you have your numbers, and an audit will take you until March," he says.
  • "There is the same volume as the first couple of months in 2022, while volume is up 20% compared to 2023 — though based on very small numbers," Tayeh explains.

Reality check: Limited partners need liquidity, and private equity will have to bring portfolio companies to market if they want to raise new money.

  • "You can't put every company in a continuation fund," Tayeh says.
  • But pricing is still rich for quality assets and bid-ask spreads for companies that aren't pristine will hamper transactions, Tayeh says.

State of play: Several multibillion-dollar consumer deals are on hold right now due to antitrust review, says Solomon managing director David Shiffman. (About $45 billion worth, per our calculations).

  • Those include Campbell Soup's $2.7 billion acquisition of Sovos Brands, the $24.6 billion merger of Kroger and Albertsons, fashion group Tapestry's $8.5 billion acquisition of rival Capri, and PE firm Roark Capital's $9.6 billion purchase of sandwich chain Subway.
  • Additionally, activist situations are brewing at several large strategics, including Macy's, Fossil, Kohl's, Hanesbrands and VF Corp.
  • Specialty retailers like Express and Children's Place are also experiencing liquidity crunches and may add to dealflow.

Editor's note: This story has been corrected to reflect that the statement about Express and Children's Place is based on previous reporting (not on what Shiffman said).

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