Nixon Peabody welcomed a panel discussion featuring insights from industry experts in middle-market private equity and investment banking to reflect on takeaways from middle-market M&A in 2023 and to forecast trends and industry insights for private equity in 2024. The panel featured Andrée Bourgon of Grant Thornton, David Caro of Vesper Company, Alexandra Feldman of Houlihan Lokey, Matt Konkle of G2 Capital Advisors, and Christina Pai of Fort Point Capital and was moderated by Nixon Peabody corporate partners Phil Taub, Greg O’Shaughnessy, Amy O’Keefe, and Rachel Pugliese.
State of the current macro M&A environment and private equity market outlook
The panelists discussed the caution taken by private equity firms with respect to deal activity in 2023. Many complicating factors contributed to an overall turndown, including well-known factors such as the spike in interest rates, geopolitical uncertainties, supply-chain issues, and industry-specific factors such as the various regional bank failures and investors’ waning interest in tech products. This market uncertainty created headwinds for many middle-market private equity firms, particularly when coupled with lofty expectations from investors accustomed to a decade of outsized returns. Notwithstanding, the panel highlighted the resilience of family-owned and founder-led businesses (particularly in the lower middle market, which fared much better than the core middle market in 2023).
Our panelists noted that the turbulent environment in 2023 led to less visibility for companies looking to be acquired and made it difficult for private equity sponsors to offload their portfolio companies at expected multiples. As a result, private equity deal volume declined in 2023, with exits down 21% and capital raising down 13%. Bolt-on and roll-up acquisitions were popular with private equity in 2023 to the detriment of comprehensive platform acquisitions. The panelists predict strategic buyers will remain acquisitive in 2024, with steep competition for the most desirable assets.
Also, in 2023, non-traditional lenders participated in the market at an increased clip, leading to repricing and impacted valuations. The panelists highlighted the resilience of asset-backed businesses in the face of interest rate hikes, though companies with smaller and less visible assets felt a greater impact.
Industry trends
The panelists shared their insights on industry themes developing in 2024 and on particular segments of the market that private equity firms will favor this year. Despite a turbulent 2023, the panelists are “cautiously optimistic” (a sentiment shared continuously throughout the event) about an increase in transaction volume in 2024, as pent-up demand and adjusted expectations drive more deals. Family-owned businesses will continue to enter the market, while sectors that generate recurring revenue and continuation vehicles, like business services, will receive increased investor interest.
The beauty and personal care industry, for example, will present significant opportunities for investors, particularly carve-outs of underperforming assets from strategic portfolios and acquisitions of niche brands. Private equity firms will also continue to focus on assets that strategics may overlook, such as clinical skincare or fragrance brands with high growth rates. In particular, there has been an emerging trend of new venture growth in sun-care elements associated with skincare. While many brands tout science-backed claims, there are limited efficacy studies to support them at present, making it an interesting and growing area of the market.
The panelists also focused on the sports, music, and media industries, in which we have seen a shift from traditional linear media to customized and decentralized content, with a focus on data-driven decision- making and monetization. The digital content industry has been categorized into four main business models: (i) creator tools, (ii) content creation platforms, (iii) rights management, and (iv) asset management. The creator tool space, in particular, has seen a capital influx due to the growth of the “creator economy,” with significant opportunities for innovation and investment. Another area of focus has been the rise of the name, image, and likeness (NIL) market and the soaring potential for NIL rights to become more monetizable.
Finally, the panel ended with a discussion on AI’s impact on the M&A environment and private equity investment. For example, AI will significantly increase productivity in coding and software development, making those essential functions more accessible to small and midsize companies. However, the panelists emphasized the shift in focus from technology and software to basic, hands-on services, driven by concerns about AI disintermediation and long-term viability, and citing the importance of recurring revenue in investment decisions. Sectors that AI cannot disrupt on a fundamental level will receive increased attention from investors (think essential, repeat services like landscaping, maintenance, and remediation).
Overall, “cautious optimism” reigns, though our panelists do expect an uptick in transaction volume in 2024 as markets stabilize, interest rates likely reduce, and desirable targets enter the playing field after waiting out the uncertainties of 2023.
At Nixon Peabody, we bring our sharp training in corporate finance law to identify market opportunities, spot risks and drive strategic growth. If you have questions industry trends and market overview insights shared in this article, contact our team today.
