PMCF’s 2024 M&A Outlook – 5 Factors That Could Impact the Middle Market

While the M&A market underperformed in 2023 amidst continued macroeconomic headwinds in the form of geopolitical tensions, rising interest rates, and fears of an economic recession, the latter half of the year showed signs of resilience as M&A activity began to stabilize.

Looking ahead to 2024, multiple factors contribute to an optimistic outlook across industry sectors:

Growing backlog of middle-market deals

PMCF reports a substantial amount of recent pitch and sale-planning activity, with a significant number of deals taken to market in the latter half of 2023 amidst sellers’ optimistic outlook in 2024. Similarly, there’s a record amount of unrealized value in private equity funds’ portfolios due to a lack of exits in the past 12-18 months. The average holding period for buyouts jumped to 7.1 years in Q4 2023 for U.S. and Canadian private equity funds in comparison to a 5.8-year average between 2014 and 2023. A stabilizing rate environment bodes well to satiate the pent-up demand for exits in 2024.

Abundance of dry powder

With trillions of dollars in dry powder available, it’s anticipated that investors and strategic acquirers will be motivated to transact in a stabilizing market. This year, the abundance of capital held by private equity funds, venture capital investors, and acquisitive companies should initiate a strong start to deal-making activities.

Notable, many private equity groups urgently need to deploy capital or risk not utilizing all raised funds. This “use it or lose it” paradigm should make private equity groups more aggressive in 2024.

Increasing demand for proven business models 

Even in 2023, with decreased market activity, average EV/EBITDA multiples observed an uptick over previous years as organizations with solid fundamentals and a track record of resilience commanded premium valuations. This trend is expected to continue into 2024 as the demand for companies with differentiated offerings and proven business models drives more substantial multiples.

Stabilization of the credit market

Following multiple waves of interest rate hikes last year, the Fed’s recent announcement to maintain current rates has stabilized the credit market. The normalization of a higher rate environment has led to an uptick in available funding sources to help fuel market activity, despite the assumption that banks will continue to leverage restrictive lending policies. Non-traditional funding sources, such as alternative lending platforms and fintech companies, have gained popularity amidst an evolving credit landscape. This has also supported continued optimism about picking up spending in 2024.

Presidential election

Traditionally, PMCF has seen more deal movement leading up to a U.S. presidential election; in some part due to potential tax implications based on administrations. What will November 2024 bring? The short answer is businesses are already adjusting plans based on the upcoming election. However, this doesn’t necessarily mean M&A activity will abruptly stop or pause after Nov. 5, 2024 as historically there has been inconsistent data for activity post-election.

Final Conclusions

PMCF continues to see positive sentiment by buyers, sellers, and private equity for the new year: All the ingredients are there for a very successful 2024 in M&A.

As we begin the year, Q1 could be beneficial timing for a Strategic Assessment for prospective sellers. This formal process determines financial and strategic options and a course of action to enhance your company’s value.

PMCF experienced strong, notable performance amidst the marketplace uncertainty in 2023. Our team remains bullish on 2024 while our commitment remains steadfast; to guide clients through the opportunities and challenges of the ever-evolving M&A market.