BOSTON, June 20,
2023 /PRNewswire/ -- Capstone Partners, a leading
middle market investment banking firm, released its Q1 2023
Capital Market Update, reporting that total middle market
merger and acquisition (M&A) volume declined 14.3%
year-over-year (YOY) in Q1 2023 as macroeconomic headwinds caused a
slowdown in dealmaking. However, middle market deal volume
continued to outperform the broader M&A market, as total
M&A volume declined 25.2% YOY in Q1. While buyers have
demonstrated increased selectivity, quality companies with strong
margin profiles have continued to command M&A interest at
premium valuations. The Federal Reserve's ability to navigate a
soft landing will likely prove consequential for middle market
M&A throughout 2023.
Capstone Partners reports that total middle
market M&A volume declined 14.3% year-over-year in Q1
2023.
Uncertainty is seldom received favorably by capital markets and
the lack of economic visibility has caused angst among many market
participants. The Federal Reserve has yet to settle on a terminal
interest rate, with the continued strength of the labor market
complicating the task of whether to hike or pause. Recent turmoil
among regional banks has contributed to the tightening of the U.S.
economy—an element that may be difficult to quantify in basis
points. As the U.S. navigates a higher-for-longer rate environment
to quell stubborn inflationary headwinds, confidence in a
smooth recovery has often fluctuated with equity market swings,
leaving many to wonder when the U.S. will enter a recession, or if
the economy is already in the midst of one. As the economy eyes an
emergence from monetary tightening, there is hope that the M&A
market may have reached a modest trough—presenting a strong
backdrop for a recovery in middle market dealmaking.
Inflation and elevated interest rates have continued to pressure
M&A valuations in the middle market. However, there has been
evidence of some upward pricing momentum in early 2023. The average
EBITDA multiple amounted to 9.1x in Q1, following a drastic decline
to 7.2x in Q4 2022. Interestingly, it is the large-scale
transactions that have seen the most significant pullback in
pricing. The core middle market ($100-$250 in
enterprise value) has continued to be the bellwether of middle
market pricing. Valuations at this range have held steady at 10.9x
EV/EBITDA, nearly mirroring the prior year's average of 11.1x
EV/EBITDA.
Business owners, dealmakers, and lenders will be closely
monitoring the monetary policy environment and its reverberations
on the broader economy. If the U.S. has reached, or is approaching,
its trough in the M&A market, there is a precedent for what is
to come. Sellers can expect an exuberant interest from buyers
looking to reengage in inorganic growth upon a market recovery.
Timing and asset position will be key as a substantial level of
pent-up demand can be expected to create healthy levels of
competition in the middle market.
"As has traditionally been the case, M&A market valuations
and activity levels are driven more by credit trends than by equity
market levels. Tightened credit conditions have decreased the
amount of debt available for transactions as well as increasing the
cost of that debt. With higher required equity contributions and
more expensive debt, valuations have adjusted downward to maintain
returns. Further, the natural flight to quality in times of
uncertainty has further reduced supply in the short term. We look
forward to the inevitable rebound in activity as conditions
stabilize," said Phil Seefried,
Executive Advisor 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 Q1 2023.
- A breakdown of private equity dealmaking activity and data
on dry powder reserves.
- How to create an evidence-based post-acquisition strategy,
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