Estimated reading time: 2 minutes

In 2024, we anticipate the M&A landscape will likely unfold against a backdrop of resilience and cautious optimism. Despite lingering (albeit lower) uncertainties surrounding interest rates, geopolitical tensions, and the coming election season in the U.S. markets, deal activity remained reasonably active and improved slightly in the latter part of the year. Forecasters suggest first-quarter volumes will remain flat relative to Q4 with marginal risks, but overall optimism is expected to prevail through the first half of 2024.

Looking at U.S. private equity market activity, we’ve seen a notable shift in the cross-border M&A landscape. Since the highs of deal activity and valuations in the aftermath of the pandemic, cross-border M&A has slowed. Various PE fund manager surveys highlight an expectation to increase cross-border activity, with the technology, healthcare, industrial, and chemical sectors showing much appeal. Driving factors include intellectual property (especially in the technology sector), expansion into growth markets, and a pursuit of digital transformation. Overall, a positive 2024 outlook persists among PE market pundits as they anticipate a resurgence in secondary transaction volumes, noting several factors such as significant projected levels of $220 billion in dry powder, LP liquidity requirements, and GP valuation adjustments that will narrow bid-ask spreads.

Participants in the European private markets expect to see improving deal flow and a more accessible fundraising environment in early 2024 as they become increasingly comfortable with the economic environment, the reference rate outlook, and portfolio performance expectations. For existing portfolio investments, many market participants expected performance to generally hold up with some potential relief from high cash interest expense as reference rates are believed to be at peak levels. While idiosyncratic issues will likely continue, overall default rate expectations remain modest, albeit higher than current levels.

Overall, valuation analyses need to consider case-by-case situations focusing on fundamental performance, outlook, affordability of debt, and available liquidity.

Valuation Trends

We expect dealmakers will continue injecting creativity into agreements to mitigate risks while actively engaging in transformative deals to ensure long-term success and positioning companies in a rapidly changing, competitive market space.

Earnouts and seller financing are expected to maintain popularity to get deals to the finish line in 2024, especially in private transactions. In 2023, we saw them play a pivotal role for buyers and sellers in bridging valuation gaps and fostering successful deal outcomes.

2023’s growth streak of the continuation fund market continued and is likely to gain more momentum in 2024, seemingly becoming a preferred exit method for PE fund managers. It remains critical for all constituents involved to focus on the necessity of an independent valuation analysis, likely in the form of a fairness opinion for these transactions. With so many interested parties – including the SEC – a fairness opinion is legally prudent and now a regulatory imperative as of November 2023.

Since the implementation of new SEC rules around Pay versus Performance, companies are now required to comply, leading to increased complexity in valuation requirements. Recognizing the confusion and stress, the SEC released additional guidance to facilitate compliance, and well ahead of proxy season, VRC has been helping clients prepare supportable disclosure tables that can withstand scrutiny.

ESG considerations, which gained prominence in 2023, will continue influencing valuations in 2024. Asset managers are increasingly aware of how ESG factors are used to market investments, with regulators cracking down on their usage across the investment industry. Sustainability-linked loans, falling under the ESG umbrella, are becoming widespread, introducing complex pricing and valuation treatments.

The global tax landscape will be pivotal in shaping M&A in 2024. The ongoing changes to international tax regimes driven by the OECD’s efforts to harmonize global tax rates are leading multinationals to restructure their business operations and optimize tax exposure, emphasizing the intricate interplay between taxation and valuation in cross-border transactions.