Tim Clarke, Lead Analyst, Private Equity at PitchBook, noted that the M&A recovery that commenced in Q4 2023 is now “gaining steam.”
Tim Clarke from PitchBook pointed out in an extensive research study that with the first nine months of the year now in the books, global M&A activity has charged ahead by “27.6% in deal value and 13.3% by count YoY.”
According to the latest update shared by the researchers at PitchBook, those gains will likely get trimmed as we begin to “lap last year’s very strong Q4, which kicked off the resurgence in M&A activity, but they are impressive, nonetheless.”
The research report from PitchBook also mentioned that while corporate-led M&A came out of the gates early, PE activity lagged “due to high borrowing costs.”
The PitchBook report further noted that this began to “change in Q2, and as of Q3, the PE buyer is now all in. As summarized in our Q3 2024 Global PE First Look, YTD buyout volumes have grown by 24.0% in value and 10.4% in count from 2023.”
The PitchBook report added that the “catch-up by PE dealmaking has arrested the decline in PE’s share of M&A value, which slipped from 44.7% in 2022 to 39.5% in 2023 before righting to 41.2% YTD, roughly in line with its five-year average.”
PitchBook also stated that they had “expected 2024 to be a recovery year given that M&A almost always bounces back from back-to-back declines, as was the case in 2022 and 2023. The prior two downturns of 2007-2008 and 2001-2002 registered peak-to-trough declines of approximately 60% to 70%.”
As stated in the update shared by the team at PitchBook, this compares to “a decline of 34.7% in 2022-2023, setting the stage for a more modest recovery, which appears to be playing out.”
The recent rebound in financial sponsor activity has “been fueled by the return of big banks to the deal lending market.”
As noted in the research report from PitchBook, this led to fierce competition to “take back share from nonbanks, lowering borrowing costs on loans backing LBO deals.”
The all-in borrowing rate on US leveraged loans in the “broadly syndicated loan (BSL) market for B-rated issuers declined from a cycle peak of 11.0% in late May 2023 to 9.7% in mid-September 2024, just prior to the Federal Reserve’s half-point cut to the base rate.”
As stated in the report, the same played out in the Eurozone, with “BSL borrowing costs peaking at 9.1% in June 2023 and reducing to 8.4% one year later, just prior to when the European Central Bank rate cuts commenced. Thus, the M&A market has benefited from a “stealth” rate-cut cycle well before central banks even got started.”
With those central banks now in sync, the M&A market can look “forward to a second leg of reduced borrowing costs, this time driven by policymakers instead of lenders.”
The comprehensive report from PitchBook added that the “length and magnitude of rate cuts remain to be seen, but they arelikely to exceed the 70-100 basis points already administered by lending markets and sustain the momentum in M&A volumes for a second year at least.”
That assumes, of course, that the major economies “can avoid too hard of a landing and that geopolitical conflicts do not escalate out of control.”
As explained in the report, those risks might explain why M&A deal multiples have “firmed only slightly after falling by 20% to 25% from the 2021 peak, unlike public equity multiples, which have run away to the upside.”
That gap must close eventually, and if “resolved in favor of public valuations, M&A dealmaking and valuations for private companies have a long way to run.”
Cross-border flows between North America and Europe “continue to favor the latter, although only moderately so.”
The flow of European M&A deals featuring North American acquirers “netted to $37.5 billion though Q3 2024.”
The PitchBook report also stated that this is roughly “on par with 2023, although well below 2022 when net flows to Europe peaked at $116.1 billion and total cross-border M&A by non-European acquirers accounted for 31.6% of all European M&A value.”
Most of these cross-border flows to Europe are “coming from North America, and they are larger than the reverse flows from European acquirers of North American companies for the eighth straight year.”
The report pointed out that much of that “was powered by the persistent strength of the US dollar versus the euro and pound sterling. Purchase price multiples have also trended lower on European targets during this span, making the region attractive to US investors even without the advantage of a stronger currency.”
The report from PitchBook concluded that “as prospects for the US economy have brightened recently relative to other regions, the outflow of M&A capital from North America has slowed.”