PitchBook recently published its Q2 2023 Global M&A Report, including its latest industry research and critical industry insights. Overall, enormous cash reserves are driving an increase in M&A activity globally. Private equity firms and businesses hold $1.35 trillion in dry powder for potential M&A transactions – a figure only 9.7% shy of its all-time high.
Corporations have an even more significant amount of cash for potential transactions as they focus on acquiring other businesses to increase revenue. However, lending conditions are influencing a high frequency of smaller deals.
Although M&A transaction volumes are similar to those in 2022, deal values are rapidly decreasing. PitchBook’s report states, “This divergence between dollar volume and deal count is the byproduct of two powerful and opposing forces: significantly higher interest rates and the massive cash piles that remain on the books of corporations and financial sponsors.”
Smaller Transactions Help Maintain Steady Deal Count
Smaller deals have been influential in maintaining a relatively unchanged deal count in Q2. In recent months, add-on deals and smaller takeovers have become more attractive to PE firms because they require less debt and allow firms to continue investing in a high-interest-rate environment.
In the lower-middle market, the tech and manufacturing sectors remain hot, according to Middle Market Growth’s recent article. From our experts’ perspective, the manufacturing sector seems exceptionally robust, considering the significant level of interest we’ve observed in manufacturing companies we recently brought to market.
Looking Ahead
The first half of this year saw a decline in deal volumes, but they are still above pre-pandemic levels of 2019. Smaller deals remained relatively unchanged. We believe this trend will continue in the second half of 2023. There is plenty of “dry powder” for M&A transactions that needs to find a home soon. This pressure combined with the lack of investible grade smaller companies will sustain EBITDA multiples in the lower middle market to remain at or near historic levels.
Preparedness and a clear understanding of market dynamics are essential for business owners navigating this landscape. There has never been a better time to exit, but economic dynamics are fluid and can change quickly. If you’re a business owner in the lower middle market looking to unlock the full potential of your business exit, contact ACT Capital Advisors today.
