Preparing for an uptick in M&A: Strategies for PE sponsors in a changing market

A positive outlook from the banks

Many global investment banks are signaling that their deal pipelines are picking up. Anu Aiyengar, global head of M&A at JPMorgan, recently said that private equity take-privates are up about 25% year-over-year from a previous low level. This is due partly to greater stability in the credit markets, which have stalled over the last couple of years. Speaking to the Financial Times, Massimiliano Ruggieri, head of EMEA investment banking at Morgan Stanley, said, “It’s clearly a better environment from a transaction point of view. You can definitely point to a higher level of engagement from clients, both investors and issuers, that has continued throughout the quarter.”

Similarly, Phil Berkowitz, chairman of global TMT investment banking at Jefferies & Company, has shared that deals worth more than $1 billion are up 26% over the past year, a signal that M&A activity is gathering momentum. The Financial Times cites a rise in European M&A activity, recording a 31% increase this year over the same period and noting the U.K.’s particularly high increase in dealmaking with M&A up 74% annually.

The CEO of an investment banking advisory firm recently shared in an interview that he believes M&A transactions will top $2.5 trillion in 2024. While that number is down from $3.2 trillion in 2023 according to Bain, it comes on the heels of a slow first half, leading to the expectation of a strong recovery in the back half of 2024. Market conditions are not conducive to dealmaking given interest rate increases and concerns over valuations, but as these conditions start to look more favourable, dealflow should follow.

PE sponsors are feeling pressure to act

After a period of low distributions to investors, sponsors are under some pressure to monetise assets and return capital. LPs also rely on these distributions to invest in new PE funds. When exactly central banks will cut rates to the levels the market is predicting is uncertain. But a drop in rates will undoubtedly encourage more deal activity and will make debt financing costs more attractive to global sponsors.

Perfectly timing the market is not always possible but a shift in sentiment is already underway, and PE sponsors are primed to assess new opportunities and get ahead of others.

Considerations for companies planning an M&A deal

As deal flow resumes, companies seeking to transact in the M&A market should consider a financial risk management framework that protects them throughout both the transaction period and the investment cycle. One such strategy for mitigating exposures arising between the signing and closing of an M&A transaction is deal-contingent hedging. This tool can be applied to FX, interest rate, and commodity risk. The types of contingencies covered by these products are also broadening from regulatory and similar approvals, to the successful completion of any debt financing associated with the transaction. Read more about this strategy in Chatham’s white paper and get in touch with our advisors that can help you find the optimal capital structure for your transaction.