Private-equity dealmakers are anticipating consumer M&A has reached its bottom.
Why it matters: The hope is the market can only go up from here.
The big picture: Private equity deal volume dropped 16% in the first half of the year compared with the same period in 2023, according to PitchBook.
Yes, but: New auction process activity has been strong rolling into September, with Labor Day serving as a launching pad, says Adam Filkin, a head of consumer and essential services at William Blair.
Zoom in: PE is looking to invest in areas with reliable consumer spending.
- There's a lot of activity in home services, like pest control for homes, HVAC servicing, roofing and auto services, Filkin says.
- "Many of the private equity investors in the consumer landscape have a pretty well-developed thesis on investing in services that touch the consumer," he says.
- Generally, investors are looking for predictable and recurring growth — and are finding it in reasonably-priced consumer health, beauty and personal care brands, he adds.
Zoom out: Consumer spending has dropped over the past two years due to geopolitical tensions, global conflicts and the upcoming U.S. presidential election, according to Boston Consulting Group.
- High inflation has also pushed up prices on consumer staples, further tightening budgets in other parts of the basket.
- Looking ahead, about 28% of consumers say they plan to spend more than they did last year while 27% say they expect to the spend less, according to Boston Consulting Group's recent holiday report.
- Only 45% say they plan to spend the same as last year.
What they're saying: "The private-equity investor continues to be incredibly discerning about what they want to chase," says John Tilson, head of Brown Gibbons Lang's consumer group.
- "The door for consumer discretionary is basically closed, except in very special circumstances," Tilson says.
- Consumers care more about mission-critical items, especially when they're already feeling the squeeze from elevated food, fuel and housing prices.
Between the lines: Although interest rate cuts are promising for future dealmaking, many sponsors are still sorting through the aftermath of a high-rate environment, Tilson says.
- Many businesses acquired during the frothy deal valuation era of 2020 to 2021 are over-levered and have struggled to grow.
What's next: Tilson says he's pitching businesses that are looking to hire a banker in the next three months but don't intend to hit the market until 4Q25, giving PE buyers more time to see a longer tail of growth.
- "Once your company has been able to perform consistently, up and to the right, even if it's 10% growth, for 12 to 18 months minimum, then I think you're ready to transact," Tilson says.
The bottom line: "It feels more like a normal market," Filkin says.
