We recently had the privilege of attending the ACG DEALMAX conference in Las Vegas, where industry professionals gathered to discuss the latest trends and insights in the world of M&A. One prevailing theme that emerged from the conference was the significant shift of market energy to the buyside. This shift was highlighted by a notable comment from a prominent investor, who emphasized:
“We’ve raised substantial funding and need to put it to work…”
Our Buyside team engaged in more than 50 conversations with private equity (PE) groups, many of whom actively utilize intermediaries. What stood out during these discussions was the remarkable increase in PE groups launching programmatic M&A strategies for their portfolio companies. Several factors were identified as drivers for this trend:
- Add-on acquisitions have emerged as a natural way for companies to fill in growth gaps.
- Valuation expectations have moderated, making it a somewhat more favorable environment for buyers.
- Sellers have become more open to transaction structures, recognizing the uncertainties prevailing in the end-market.
While the surge in programmatic M&A offers promising prospects for buyers, it has also brought about an increase in transaction complexities. During the conference, several challenges were identified, including the following:
- Rollover equity: Rolling equity into the “Newco” is a natural way to align incentives, and this structural element has the added benefit of reducing the amount of debt required. A very helpful development given tightening credit markets.
- Seller notes: Participants suggest seller notes can provide an attractive alternative to 3rd party debt and accelerate the transaction underwriting process.
- Earnouts: Earnouts have traditionally been used to bridge valuation gaps. However, in an environment characterized by uncertain end-market dynamics, sellers are often reluctant to commit to earnouts. Instead, there is a greater emphasis on revenue-based performance metrics with achievable targets. Despite the challenges, earnouts remain a necessary component in certain situations, particularly when debt funding is involved.
- Lower levels of debt: In the past, the market was comfortable with debt loads covering 4-5 times EBITDA. However, underwriting standards have become more stringent, leading to a decrease in acceptable debt coverage ratios to 3-4 times EBITDA. This shift has resulted in higher interest rates and more demanding requirements for buyers. Consequently, buyers now find themselves seeking more debt term sheets, with the number increasing from 2-3 to 5-6.
ACG DEALMAX 2023 proved to be an exceptional gathering, and we were thrilled to witness the realization of our prediction regarding the prominence of buyers in the M&A landscape during 2023.
