Capstone Partners Reports: Middle Market M&A Likely Reaches Trough, Near-Term Rebound Expected

Rhea-AI Summary

Middle market M&A volume declined 15.9% YoY in Q2 2023, but dealmaking remains resilient. Total transaction volume across all deal sizes declined 24.8% YoY. M&A activity in the middle market is expected to rebound in Q1 2024. M&A valuations compressed in Q2, falling to 9.2x EV/EBITDA. Rising interest rates and tightened lending environment contributed to downward pressure on transaction pricing. Quality businesses with sustainable cash flows continue to attract buyer attention. Middle market deal activity showcases resilience. Business owner response and willingness to transact is increasing in Q3 2023. Latent interest in dealmaking and accessing capital is appearing. Best-prepared businesses will be in a prime position to capture opportunities. Key considerations for business owners on dry powder levels, buyer appetite, lending conditions, and M&A pricing trends. Private equity dealmaking activity and data on dry powder reserves. Overview of equity private capital market conditions. Full report available.

Positive

• M&A activity in the middle market is expected to rebound in Q1 2024
• Quality businesses with sustainable cash flows continue to attract buyer attention
• Business owner response and willingness to transact is increasing in Q3 2023
• Best-prepared businesses will be in a prime position to capture opportunities

Negative

• Middle market M&A volume declined 15.9% YoY in Q2 2023
• Total transaction volume across all deal sizes declined 24.8% YoY
• M&A valuations compressed in Q2, falling to 9.2x EV/EBITDA
• Rising interest rates and tightened lending environment contributed to downward pressure on transaction pricing

BOSTON, Sept. 14, 2023 /PRNewswire/ -- Capstone Partners, a leading middle market investment banking firm, released its Q2 2023 Capital Market Update, reporting that total middle market (under $500 million in enterprise value) merger and acquisition (M&A) volume is likely approaching or has reached its trough, with deal volume declining 15.9% year-over-year (YOY) in Q2. Middle market dealmaking has continued to remain more resilient than broader M&A markets, as total transaction volume across all deal sizes declined 24.8% YOY. Anecdotally, dealmakers are noting a buildup in transaction inventory, with the expectation for a rebound towards Q1 2024. In addition, following recent years of COVID bumps to revenue, the market has entered a more normalized EBITDA environment for many private businesses. Strategics have continued to pursue quality companies, and while sponsors have largely held off on exits, they have continued to actively evaluate investment opportunities.

M&A activity in the middle market has likely reached its trough—and near-term rebound is expected.

Following 525 basis points of interest rates hikes since March 2022, the unemployment rate has hovered near 3.5% in 2023, equity markets have recorded positive gains, and consumer spending has incrementally ticked upwards—a scenario that may have been deemed an unrealistic best case outcome at the start of the Fed's monetary tightening campaign. It is too early for the Fed to declare victory but the current state of the market begs the question, is this really an economy on the brink of a recession? The U.S. has seemingly entered a structurally higher rate environment, one that may persist in the near-term. However, through the first half of 2023, the economy has largely shown its ability to contend with a higher cost of capital. Equity indices have continued to record healthy returns, despite a higher rate environment, and even shrugged off a downgrade to U.S. debt. Continued disinflation in the following quarters will likely prove pivotal for near-term economic growth. Through the first half of 2023, macroeconomic headwinds have failed to derail a resilient U.S. economy—which bodes well for near-term dealmaking opportunities.

M&A valuations compressed in Q2 compared to the prior year, falling nearly a full turn to 9.2x EV/EBITDA from 10.0x EV/EBITDA. Rising interest rates have facilitated a tightened lending environment, contributing to downward pressure on transaction pricing. However, quality businesses with sustainable cash flows and a track record of performance have continued to attract buyer attention. Buyers have also increasingly sought businesses with revenues driven by volume growth, rather than elevated prices, an important consideration as U.S. disinflation has continued to moderate the cost environment.

Middle market deal activity has continually showcased its resilience as business owners do not always have the option to wait out market turbulence. Deal markets ebb and flow as economic cycles permit but the drivers of private markets differ from other areas of the economy. LPs demand return on their invested capital, and strategics in competitive markets are in constant need of operational synergies and new growth channels—all amid one of the most notable wealth transfers in history as the baby boomer generation ages. The exact future inflection point in M&A activity cannot be known, but it is likely sooner than many had forecasted.

"After a historic 2021 for M&A, recessionary fears coupled with rising interest rates and challenging credit markets created a wait-and-see mentality for business owners from Q2 2022 through Q2 2023 regarding the M&A market. However, Q3 2023 has shown a steady increase in business owner response and owners' willingness to transact in 2024. From the conversations we have had in Q3 2023, there is an appearing latent interest in dealmaking and accessing capital and we anticipate those businesses that are best prepared will be in a prime position to capture opportunities as the fog lifts," said Peter Asiaf, Head of Business Development at Capstone Partners.

Also included in this report:

• Key considerations for middle market business owners regarding dry powder levels, buyer appetite, lending conditions, and M&A pricing trends.
• Commentary on the primary drivers of transaction volume and valuations through Q2 2023.
• A breakdown of private equity dealmaking activity and data on dry powder reserves.
• An overview on equity private capital market conditions, featuring Capstone's Equity Capital Advisory group.
• How to leverage a Quality of Technology assessment, featuring Capstone's Financial Advisory Services group.

To access to full report, click here.

ABOUT CAPSTONE PARTNERS

For over 20 years, the firm has been a trusted advisor to leading middle market companies, offering a fully integrated range of investment banking and financial advisory services uniquely tailored to help owners, investors, and creditors through each stage of the company's lifecycle. Capstone's services include M&A advisory, debt and equity placement, corporate restructuring, special situations, valuation and fairness opinions and financial advisory services. Headquartered in Boston, the firm has 175+ professionals in multiple offices across the U.S. With 12 dedicated industry groups, Capstone delivers sector-specific expertise through large, cross-functional teams. Capstone is a subsidiary of Huntington Bancshares Incorporated (NASDAQ:HBAN). For more information, visit www.capstonepartners.com.

For More Information Contact:

Rebecca Levesque
Director of Marketing
617-619-3318
rlevesque@capstonepartners.com

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SOURCE Capstone Partners