May 13, 2024

How The Painful M&A Market in 2023 Set the Stage for 2024 – Light at the End of the Tunnel or Another Train?

2023 was a very difficult year in M&A. How did this happen, what did we learn and how does this inform us on the M&A environment in the second half of 2024? Part one of a four part series.

In 2023, the private equity industry felt the ongoing impacts of several harmful trends that emerged at the end of 2021 and throughout 2022. Notably, rising interest rates caused significant declines in deal flow (both buy and sell side) and fundraising. As a result, the PE lifecycle of buying, improving, and selling companies was drawn out, mimicking a similar timeline in 2006 vintage funds. A recent webinar by Bain & Company, entitled Inside Bain’s 2024 Private Equity Report, highlights many of these 2023 trends. In this four-part series, we discuss how we got to our current investing climate, the expectations for 2024, and how Lancor has enabled our private equity clients to combat these challenges, getting their investments back on track. This first post in the series discusses how we arrived at the slow deal flow seen in 2023.

One critical piece often misunderstood is interest rates. In 2021, the US had a historically low interest rate of 6%, initially encouraging deal flow. However, the issue was both the percentage and the speed of interest rate increases that would characterize the following 18 months. Between 2022 and 2023, rates rose by 500 basis points – a rapid increase for only 12 months. Not only did this make debt more expensive, but it created a market marred by uncertainty. As interest rates continued to increase every few months, it became exceedingly challenging to predict the cost of financing an acquisition, and firms that did attempt were often wrong. The result was a 60% drop in deal volume in 2023 compared to 2021. Reduced deal flow, coupled with the inability to accurately gauge the cost of debt, led to another “knock-on” issue; fundraising efforts took a massive hit. Essentially, the Limited Partners (”LPs”) who initially invested with PE firms did not receive the returns they had anticipated. In fact, many LPs received little to no capital back as investors had yet to deploy it in new deals. The subsequent lack of capital left LPs hesitant or unable to redeploy their wealth into new funds.

Lastly, when faced with the challenge of a slow M&A market, investors took a long look at the management teams of their portfolio companies and replaced those who were not deemed top-quartile performers. With the previous year’s growth and experiential deal flow gone, companies could no longer mask a lack of operational talent in the C-Suite. As a result, operator-first firms like Lancor experienced another record year in retained search placements (reactive part of our model). Unique to Lancor, there was a significant increase in the closing of executive-led deal angles, whereby Lancor works with top-tier executives to develop differentiated deal angles (a proactive part of the model that saw Lancor close nine new deals in 2023.). Lancor’s network of experienced executives continues to be an asset to investors looking to see around corners and invest where these “river guides” see advantaged investment opportunities.

Lancor’s business model is built on working with the world’s best executives and leveraging their operational mindset. Through our efforts in executive search and advisory practices, we have seen how operational improvements are the best way to achieve financial returns. This can be done through traditional search and C-suite placements or Lancor’s Advisory Business  (”LAB”). Amidst the current volatile market, Lancor’s pre-deal advisory services allow our private equity clients to connect with top executives who can help determine if an asset is worth buying or, if not, (usually the case) which companies are better positioned – even when they are not in a process. This unique model helps our clients in diligence processes to have an asset-specific game plan – vetted by executives with direct experience in asset or vertical – before deploying capital.

In part two of four, we will discuss how M&A volume has impacted private equity fundraising.