Key trends to monitor in 2024
Geopolitical uncertainty, improving markets
Although geopolitical uncertainty remains, the worries around inflation, interest rates, and economic conditions that made deal-makers cautious in 2023 seem to be easing. There is market optimism that M&A will pick up in 2024. BlackRock’s acquisition of Global Infrastructure Partners and LPL’s merger with CUSO Financial are reinforcing the optimistic sentiment
Creative deal structures
Today’s buyers and sellers appear to be willing to embrace alternative deal structures. In the later half of 2023, there were more deals in which sellers were willing to accept stock instead of cash, sales of minority stakes instead of company sales, and “earn outs” - where the buyer and seller bridge gaps in their valuations by waiting to pay-out the full purchase price until certain milestones are achieved. Buyers with cash may pursue transactions that better deploy their capital and make deals that do not need financing. Such creative structures are likely to continue in 2024
A growing sentiment that M&A is back
Market indicators are suggesting that deal activity may increase in 2024. The S&P 500 Index ended 2023 at near record highs, corporate balance sheets remain strong, financing markets appear to be improving, and CEO confidence continues to climb (often linked to M&A). Additionally, while the stock market posted strong gains, there was a significant gap between companies with strong operating performance and those that struggled. This discrepancy may encourage a favorable environment for activist investors to push for changes at undervalued companies. In 2023, 982 companies were subject to activist campaigns globally, a 4% rise compared to 2022 and the highest level since 20191
Market democratization
The democratization of the market continues. With information and technology parity prevalent in the market, investors are increasingly demanding customization and access to private market products traditionally off-limits to retail investors (e.g. direct indexing, private credit, etc.). KKR for example, have announced open-ended direct lending funds, highlighting the push into private credit products
The need for performance improvement
The current macroeconomic headwinds that require companies to strengthen deal-making economics also make it necessary for them to strengthen their core business operations. This means, finishing any integrations that have started and tackling technology issues that are often ignored to create value from their deals. Companies that improve their overall performance will be better positioned for deal-making in 2024
The rise of alternatives
High interest rates coupled with more stringent capital and liquidity requirements among traditional lenders has led to opportunities for private credit to step in as an alternative form of financing. High levels of dry powder among private equity funds and a large portion of commercial real estate mortgages coming due in the next few years have further heightened demand. Despite high interest rates, retail customers are increasingly moving funds from bank deposits to higher yielding money market funds (MMFs) and fixed income investments. The banking system will continue to find it hard to support the growing credit needs of the market. As such, private credit is expected to grow from $1.4 trillion in Jan 2023 to $2.3 trillion in 2027, a compound annual growth rate (CAGR) of 16%