2023 Katten Middle-Market Private Equity Report – M&A/Private Equity – United States

Negotiators split on EP outlook amid market uncertainty

Mid-market private equity (PE) firms have mixed expectations for the U.S. mergers and acquisitions (M&A) market in 2023, citing high inflation and fears that interest rates will continue to climb, but Negotiators maintain cautious optimism in key sectors. Although many investors expect to make additional acquisitions, some are preparing for a difficult regulatory environment, while others are favoring other types of transactions to mitigate the impacts of macroeconomic volatility.

This shared perspective is reflected in this report, which is based on a survey of 100 US mid-market private equity dealmakers engaged in a wide range of industries, including financial services, education, healthcare , insurance, manufacturing and industry, media and entertainment, real estate and technology. Nearly three-quarters of investors expect deal activity in 2023 to remain at the same level as last year or increase (40% and 33%, respectively), while more than a quarter (26%) expect to a slowdown.

The amount of dry powder available to private equity firms could be to blame for this disconnect, especially as an overheated economy, national policymaking and geopolitical tensions come to a boil. With debt markets tightening and financing more difficult to obtain, liquidity has become crucial to closing deals. Although some traders struggled, others took advantage of falling valuations to expand their investments in technology and financials. With the darkening clouds of a potential recession on the horizon – and a clearer picture of what a post-COVID-19 economy will look like – it should come as no surprise that if the majority of players market do not anticipate a slowdown in trading in 2023, nor are they extremely bullish.

Looking at individual sectors, some traders remain optimistic despite recent media reports of layoffs in the technology and financials sectors, falling stock prices and signs of a slowdown in key industries. More than half of private equity firms (58%) invest in financial services, the top sector, followed by real estate at 48% and technology at 43%. Additionally, respondents see ample opportunity in technology and finance, with traders seeing the potential to take advantage of falling valuations in the tech industry as well as transformative opportunities in the financial sector in the months ahead.

These factors have spurred a series of quick and varied strategies by investors, many of whom have turned to fully equity-backed deals to gain the upper hand in the bidding process. This deal structure requires private equity firms to agree to finance the full purchase price of a business in advance if they are unable to secure debt financing by the closing date. All-stock trades are seen by some as particularly aggressive in today’s debt-tight market; however, they ranked as the most important element in creating successful deals in 2023, and a majority of respondents predict an increase in all-stock deals in the future.

Whether the current political and economic turmoil is dampening mergers and acquisitions or spurring additional activity, it’s clear that 2023 presents a wide range of opportunities for dealmakers – even if that means adopting new acquisition strategies to adapt and thrive in the face of global market disruption.

The M&A market remains dynamic in the face of economic uncertainty and rising rates

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