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