Lyle Wallace

It is not news to anyone in the deal world that M&A deal volume and deal values fell rather precipitously in 2022 from 2021 levels. The private equity deal market aligned with the broader M&A market. Private equity deal volume was off by almost 20% in 2022 and deal values were off by nearly a third. Even with that significant dip, however, private equity deal volume and deal values remained above historic norms.

Since the central bank began tightening monetary policy in March of last year, the federal funds target rate has increased by 450 basis points, marking the fastest rate increase in history. Opinions are mixed as to how the Fed will act for the remainder of the year, but Fed Chair Jerome Powell has made clear there are more rate increases to come if inflation continues to stagnate. As interest rates go up, valuations come down.

Following a particularly extended robust M&A cycle and an extraordinarily frothy 2021 market, private sellers have grown accustomed to what might be considered abnormally high valuations.  Even though valuations have come down by several multiples of EBITDA on average, valuations remain historically rather high. The challenge is in large part a mix of perception and uncertainty. Macroeconomic conditions, global turmoil, and political considerations that make the M&A market more challenging have all combined to create a not insignificant headwind to the M&A market in 2023.

What has not changed for private equity is the enormous amount of capital that needs to be deployed and a relatively limited amount of time to deploy it. The appetite for acquisitions remains strong, but the gap between seller expectations and financing realities is leading to an enormous disconnect.

What this means for private equity M&A is an increased focus on international transactions given the strong U.S. dollar, a focus on carve-outs of underperforming private equity assets, and alternative transaction structures, like co-investments or minority investments that require less leverage. Ultimately, until there is a valuation reset among sellers and private equity, challenges will remain.

The basic truth remains, however, that 10,000 baby boomers turn 65 every day and many business owners need to find an exit, and the enormous amount of private equity dry powder needs to be put to work.

About the Author
For more than 20 years, Lyle Wallace has counseled clients through complex transactions and served as outside counsel to private companies throughout the U.S. in numerous industries.