At the start of the year, we had high hopes for a resurgence in dealmaking. Forecasters widely anticipated a slower rate of economic growth coupled with falling inflation, providing much needed evidence for the Central Banks to start cutting rates.
But the U.S. economy continued to be resilient in the first half of the year. Despite higher inflation, economic growth continued, driven by robust consumer spending and a strong labor market. Central Banks took a more cautious stance leading to tighter financial conditions and while strategic M&A accelerated, private equity remained sidelined.
We enter the back half of the year at a delicate juncture. In recent months, inflation pressures have cooled, and wage growth has come in below expectations. Markets are currently pricing in a September rate cut, which could open the floodgates for private equity to resume dealmaking.
The recent game of musical chairs among Biden, Harris, and Trump for the U.S. presidency adds a layer of uncertainty to both the public and private markets as investors grapple with potential shifts in policy directions and economic priorities. Until there is greater visibility into interest rates and the U.S. presidency, we think deal activity will be shifted, not halted, until Q4 of this year.
For those thinking of going to market, the balance of the year should be used to thoughtfully prepare for a 2025 launch. For those in market, we believe several of the themes we witnessed at the start of the year will continue to persist:
- Resilient businesses continue to be highly sought after as acquirors look to stickier and more predictable revenue models to drive growth and mitigate risk. In these times of market uncertainty, predictability of earnings will be key to garnering premium valuations.
- Acquirors will continue to focus on unit economics and customer-level data. Sellers should be prepared to furnish and answer more granular information than they have historically as prospective acquirors try to ascertain “new normal” performance.
- Tuck-in acquisitions will continue to be prominent in the near term as the cost of capital remains relatively high and risk tolerance evolves.
- Elongated diligence periods will continue to be pervasive, with prospective acquirors stretching diligence processes out to better assess financial performance against projections and potentially re-trade on valuation. Now, more than ever, it is important to engage an advisor to run a tight M&A process to optimize the outcome.
As you look to navigate complexities within your own business, we at DCA welcome the opportunity to discuss where we can help you find value.