CIL: Mid-market dealmakers reporting lower activity, but expect rebound

Investors are reporting lower deal activity this year, according to CIL’s US Mid-Market M&A Pulse Check 2023 report, but expect a rebound in the next 12 months. The report surveyed 110 respondents, primarily in investment banking and private equity, in April and May 2023.

After a busy M&A market in 2021 and 2022, the results reveal a decline in the perceived level of deal activity. Rapid increases in interest rates have reduced access to debt and driven up costs – resulting in 43% of respondents reporting low or very low deal activity this year, up 35% from last year. Meanwhile, 25% said it was average and 32% said it was high.

The main obstacles to getting deals done were a lack of high-quality assets (an increase of 21% from 2022) and high interest rates resulting in difficulties accessing debt (an increase of 22% from 2022). Thirty-eight percent of respondents highlighted the prevailing market uncertainty as a key challenge.

This year has also seen a polarization in the perceived quality of assets on the market. Economic uncertainty has led investors to prioritize recession-resilient assets – which are generally seen as high quality. On the other side, some assets that have come to market in the last year are being divested by owners who can’t maintain their holdings over an extended period. Investors may see these assets as lower quality.

CIL’s 2023 report results also reveal a turn away from the seller-favorable environment of the last couple of years to one that favors buyers. With the post-Covid surge subsiding, sellers are having trouble achieving the lofty multiples that were once attainable. Buyers are positioned advantageously to leverage dampened valuation expectations.

More than three-quarters (77%) of respondents expect a buyer-favorable market to continue through the next 12 months.

Most respondents (over 80%), however, expect a material increase in deal activity by the end of 2023. This sentiment is being fueled by improving confidence in the economic outlook.

With a soft landing looking increasingly probable, respondents are generally supportive of the Federal Reserve’s monetary policy, with 54% saying it should stay the same. This suggests a strong desire to get inflation under control with sustained high interest rates.

Twenty-three percent said monetary policy should be even tighter, while the same proportion said it should loosen.