Setting the Stage: A Strengthening Foundation for M&A Acceleration

As the second half of 2024 gets underway, much has changed in terms of economic conditions, the rate environment, credit markets, and buyer and seller dynamics. While some uncertainty persists, the foundations of a notably stronger M&A market appear to be falling into place. Here, we explore the key variables at play and their net impact on the rest of the year.

An Increasingly Supportive Environment

“We’re seeing momentum in the public markets and macroeconomy, ample dry powder, growing optimism regarding future rate cuts, and favorable credit markets,” says John Neuner, co-chief executive officer. “Those dynamics have fostered an increasingly supportive environment for M&A, and we think the remainder of 2024 will continue to strengthen.”

In terms of the economy, Neuner notes that a soft landing is now the base case for most analysts due to the relative strength of the consumer and labor markets, even though both have shown pockets of softness in recent readings. According to an analysis by PNC Financial Services, consumer spending should continue to increase into 2025 due to solid job and wage gains, slowing inflation, and rising household wealth driven by house price gains and record-high stock prices.¹

In addition to resilient consumer spending, rebounding public markets and company performance are supporting increased buyer and seller confidence (Figure 1). 

Figure 1:

Source: CapIQ

“Earnings performance has been strong due to continued economic growth and consumer demand (Figure 2),” says Neuner. “And S&P 500 companies are on track to be more profitable than they have been in over a decade (Figure 3). That combination positions strategic buyers to be increasingly active in M&A, which we’re seeing in many industries.”

Figure 2:

Source: Bloomberg

Figure 3:

Source: Bloomberg

And as shown in Figure 4, there are increasingly widespread expectations for a more favorable rate environment.

Figure 4:

Source: Pensford Financial

“Overall, the financing markets are increasingly constructive for M&A,” says Neuner. “All market sectors—private credit, broadly syndicated loans, and high yield—are open and more issuer-friendly than at any point in the past few years.”

These more constructive credit markets are supporting buyer and seller confidence and helping groups optimize financing within their portfolios. Likewise, leverage multiples have stabilized and are showing signs of increasingly attractive borrower terms, with increased competition driving down pricing for higher quality companies (Figure 5). We believe this pricing improvement will continue throughout the rest of 2024.

Figure 5:

Source: CapIQ

So far in 2024, new-issue syndicated LBO loans have totaled $31 billion, while new-issue private credit LBO loans have reached $41 billion. Over the same period last year, syndicated LBO loan volume totaled $13 billion and private credit LBO loan volume $26 billion (Figure 6).²

Figure 6:

Source: Pitchbook

“There is a significant amount of capital to put to work in the credit markets,” says Co-Chief Executive Officer Bob Baltimore. “Multiple new credit funds have been raised in the past two years, and they’re looking for opportunities. At the same time, the strength of the direct lending market and the resurgence of the BSL market are helping drive competition between lenders, which means better rates, higher leverage, and more flexibility for our clients.”

Finally, while the upcoming U.S. presidential election may create some market choppiness in the fall, a Harris Williams analysis suggests this will be short-lived, and should present itself as “when to sell” rather than “should we sell.”

A Tangible Impact on M&A

Baltimore says this supportive environment is having a tangible impact on M&A markets: “Many sponsors have cited a significant uptick in deal flow over the past several months, with activity substantially increasing over prior year-to-date levels. We’re seeing the same trend in our pipeline across the industries we cover.”

In fact, during the first half of 2024, global deal volume was 17% higher on average than in the first half of 2023, reaching $1.6 trillion USD.³ While lower in select parts of Asia, the Middle East, and Europe, it was 33% higher in the U.S. and 75% higher in the U.K.⁴

Although activity is on the rise, buyer engagement continues to vary by sector and by transaction, and the quality bar remains very high. Our Consumer and Technology Groups in particular report recent upticks in activity levels. Baltimore and Neuner note that sub-$1 billion enterprise value market activity continues to be especially strong, with many sponsors actively evaluating new platforms in addition to pursuing refinancings and add-ons. While there has been more variability in deal flow volume at the upper end of the market, most recently there has been a noteworthy uptick in higher-quality larger deals.

Still, a prolonged shortage of high-quality opportunities has prevented many sponsors from being as active so far this year as they would have liked. Whether investors are behind planned deployment schedules or tracking on pace, Neuner says most private equity groups (PEGs) have expressed a strong desire to put money to work in the back half of the year: “Their intention to invest is supported by their view that other sponsors will be looking to exit due to elongated hold periods, fundraising cycles, and DPI pressure.” 

That momentum is already underway: Global PEG-backed M&A increased by 81% from the first quarter of 2024 to the second, reaching $181 billion. Globally, first-half 2024 financial-sponsor M&A was 36% higher than the first half of 2023.⁵ 

Strong corporate performance and the resulting focus on growth is encouraging strategic buyers to be more active in M&A as well. Strategics accounted for 73% of deal volume in the first half of 2024, a level not seen since 2019.⁶

The Pieces are Moving into Place

While year-to-date performance and market conditions are encouraging, Baltimore and Neuner are most excited about the groundwork that buyers and sellers have laid for a strong remainder of 2024. 

“Hold periods have extended during this period of uncertainty, and many private equity groups have used this pause to invest in their portfolio companies, pursuing more organic growth, greater efficiencies, and stronger margins,” says Baltimore. “PEGs are also steadily adopting alternative ways to generate liquidity for LPs, including single- and multi-asset secondary transactions.” 

While private equity fundraising has been challenged over the past several years by a relative lack of DPI, the first half of 2024 has seen a thawing of LP allocations and renewed interest in starting new GP relationships. “It’s important to note that the total available pool of capital has generally remained steady over the past 12 to 24 months, and that new capital flows are still driven by LP decisions concerning re-ups and ticket sizing for existing GP relationships,” says Eric Zoller, head of private capital advisory. Zoller also notes increased net flows from registered investment advisors and institutional wealth advisory platforms: “We have canvassed a significant number of new players in this LP category in the last 18 months.” 

Overall, the pieces appear to be moving into place: Macroeconomic conditions and the rate environment are improving, credit markets are increasingly supportive of M&A, strategic buyers are actively pursuing inorganic growth, and PEGs have thoughtfully created value for their LPs while readying portfolio companies for sale.  

“The stage is being set,” concludes Frank Mountcastle, head of M&A. “As LPs see more liquidity and sellers successfully exit, it becomes easier for PEGs to raise funds and for quality companies to enter the market. There’s an eager universe of buyers looking to put money to work. Given continued improvement in the overall environment, the next few quarters have the potential to be very active.” 

To learn more, please contact us. 

To learn more, please contact us. 

1. PNC National Economic Outlook2. Pitchbook3. Mergermarket4. ibid5. ibid6. ibid