After 10-year deal lows in 2023, M&A activity is set to rally in 2024, fuelled by a drop in core inflation, PE dry powder, and increased business confidence.
This positive outlook is already reflected in global M&A numbers. Year-to-date deal volume in 2024 has surged by 130% compared to 2023, with particularly strong activity seen in the Healthcare, Media, and Energy & Utilities sectors.
The UK M&A market also displayed encouraging signs in the final quarter of 2023, auguring well for a turnaround for 2024. Inward M&A jumped by £3.3bn to £8.6bn, reflecting greater confidence from overseas investors, while domestic M&A also rose in value, reaching £2.7bn, an increase of £0.2bn on the previous quarter.
Here are the three key factors expected to create conducive exit markets for businesses in the coming year.
Easing inflation is stimulating investor appetite by laying the groundwork for more affordable debt financing
UK inflation fell to 3.4% in February, while core inflation fell to 4.5% from 5.1% previously, below analysts’ predictions of a 4.6% reading. Bank of England governor Andrew Bailey told the Financial Times: “The global shocks are unwinding and we are not seeing a lot of sticky persistence [in inflation] coming through at the moment.”
Interest rate cuts are now “in play” at forthcoming policy meetings, he said.
Interest rate cuts will translate to cheaper debt for companies looking to finance acquisitions, making speculative or higher-risk deals more financially viable. Private equity firms can also leverage lower interest rates to improve their profit margins on acquisitions.
Business optimism is growing, with a quarter of UK corporates set to pursue “transformational” deals in the coming year
Grant Thornton LLP’s latest Business Outlook Tracker from early February, which surveyed 600 mid-sized businesses, found that revenue growth expectations have jumped 21 percentage points compared to December, reaching 79% – the highest level since August last year and 8 percentage points higher than the rolling average.
And business optimism is increasing, not only around revenue growth, but across the board: confidence in respondents’ funding position also increased 22 percentage points, reaching 79%. Profit expectations are also improving: 69% of respondents are forecasting increased profits – one of the highest levels recorded since January 2021.
This growing business confidence is translating to greater bullishness. A recent survey by investment bank Deutsche Numis revealed that almost nine out of 10 UK corporates see a positive picture for M&A in 2024, with one quarter expected to pursue “transformational” deals.
Private equity firms are sitting on significant uncommitted capital (“dry powder”) due to subdued M&A activity in 2023
Due to the sluggishness of 2023 dealmaking, private equity (PE) firms around the world stockpiled a record-breaking amount of cash. By 1st December, their uncommitted capital, or “dry powder,” had ballooned to a staggering $2.59 trillion. This represents an 8% increase compared to December 2022, according to data from S&P Global Market Intelligence and Preqin.
Among the UK firms flush with uncommitted capital are HgCapital LLP and Cinven Ltd.
PE firms, armed with these cash reserves, are poised to drive a surge in acquisitions throughout 2024, targeting businesses with strong growth potential and resilient models.
