Unlocking Success: Navigating the Waves of Private Equity Trends and Beyond
Coming out of an annual review of private equity buyouts and recapitalizations, we delve into the major trends impacting deal volumes, valuations, due diligence, and the credit environment in private equity throughout 2023. Understanding these trends is crucial for anticipating the trajectory of private equity deal activity as we venture into 2024.
Deal Volumes: Balancing Quality and Quantity
In 2023, private equity deal volumes have been marked by a delicate balance between quality and quantity. While the market has seen robust activity, investors are placing a heightened emphasis on securing deals that align with strategic objectives. Quality targets that offer resilience and growth potential are in focus, leading to a nuanced approach to deal selection.
Global Private Equity Transaction Activity (Source: Pitchbook)
Although many pundits suggest private equity activity has fallen off the cliff, deal volumes in 2023 still exceeded pre-2021 levels. With optimism in a soft-landing here in the U.S. and improving credit markets, market participants are optimistic that 2023 levels will be met, if not exceeded.
The total value of transactions saw a further drop as the the debt capital markets impacted private and institutionally backed owners of larger companies more heavily versus those in the lower middle market. Many of these owners have stayed on the sidelines for the exit.
Softness in commercial activity for some owners/operators (see: destocking, consumer discretionary markets, building products/services, et. al.) paused many owners/operators to come to market in 2023; however, anticipation of more normal periods ahead in 2024 and 2025 has created optimism for transactions going forward.
Private Equity Activity Heavy in South/Southeast
As we enter the 2024 conference season, we will be exhibiting and attending ACG's M&A South with over 200 private equity groups looking for more deal flow and transacting here in the South/Southeast U.S. This region has continued to be the most active region sought after by private equity, representing over 31% or nearly 1/3 of all PE transactions in 2023. This is relatively unsurprising as this region has the led the charge for PE activity over the last few years.
PE Transactions by Region - U.S. (Pitchbook)
Valuations: Keeping Perspective
Valuations have been a focal point in 2023, with a dichotomy between buyers and sellers. As cost of capital has increased across the world, private equity and buyers across the landscape have adjusted valuations downwards to meet equity returns and sellers have been reticent to move off record valuations seen in 2021. For owners out there looking to transact, striking the right balance between growth potential and realistic valuations is paramount.
Median North America and Europe PE buyout EV/EBITDA multiples (Pitchbook)
Key Takeaways:
Keeping Perspective: Median valuations dropped ~1.6x EV/EBITDA in North America and Europe, comparing 2022 to 2023. 2023 valuations ended up slightly below the 10 year avg. of 11.1x EV/EBITDA. This past year saw the PE buyout world revert to the norm versus what many of the pundits may suggest.
Valuation Trends by Region: European buyout valuations felt the global credit and macro impacts more than North American buyouts where valuations dropped to lowest levels since 2016. Although North America buyouts dropped from record levels of 2022 and 2021, valuation levels still exceeded every other period (2013-2020) over the last ten years.
Credit Market Moves
The most impacted segment of transactions were larger LBOs which saw average leverage decrease by ~1.5x. During the overheating of the debt capital markets post-COVID, 6.0x+ Debt/EBITDA or leverage for $20mm EBITDA businesses and above was expected; however, leverage on debt transactions averaged ~4.5x. Also, lenders were more cautious in underwriting LBOs throughout 2023 with increased fixed charge ratios and an uncertain macro environment. Debt/EV ratios fell over 500 basis points to 45.7%, the lowest debt/EV ratio over the last 10 years.
Debt Percent (LCD) of NA and Europe PE buyouts
Private Equity Carveouts are Building Momentum
Since Q4 2021, many have been predicting carveouts to increase; however, momentum has started to ramp up more quickly here in the last two quarters of 2023. Since 2018, only two quarters saw higher percentages of PE carveout activity than Q4 2023.
Similarly, we are seeing private equity groups reach out more frequently to explore carveouts of non-core operations within their core platforms, many of whom have been very active on acquisitions over the last 10 years. Anecdotally, we are seeing this more frequently discussed as part of plans for a greater exit down the line or recapitalization anticipated here in 2024. We have worked on over 4 carveouts since later in 2022 and anticipate this activity to continue.
PE Carveouts as a % of Buyouts (Pitchbook)
Due Diligence Trends: Tech-Enabled and Return to Comprehensive Diligence
Due diligence processes are undergoing a tech-enabled transformation. Dataroom and other due diligence workstreams continue to explore more streamlined approaches to the deal process. ESG diligence has gained momentum, especially from global private equity groups and those overseas buyers with more regulatory and oversight reporting required. There was a period in 2021 and early 2022 where diligence red flags were quickly dissolved; however, these issues are impacting deals and valuation more heavily today versus the recent past.
Anticipated Impact on 2024:
Looking ahead to 2024, everyone is watching the credit markets and the lending environment to see how aggressively these moves will impact leverage, cost of capital and valuations. We are seeing many smart owners and operators work with their advisors early to work on what they can control and put their business in the best position to seek a liquidity or growth equity transaction. We expect these trends to continue.