2023 North American M&A Overview & Q4 Private Equity Landscape

2023 M&A Overview – North America 

The 2023 M&A landscape has been influenced by economic uncertainty driven by rising interest rates, geopolitical issues, and growing recession concerns, all of which have been the main forces behind the increasingly hostile dealmaking environment in North America. The increased cost of capital as well as the growing concerns surrounding the Federal Reserve further increasing interest rates to combat inflation has taken a toll on transaction activity, having impacts on both buyers and sellers in middle market M&A. The scarcity and the increased cost of capital has and will influence many corporations to divest as companies aim to finance investments in areas of growth1. Due to this, and despite having achieved record highs in 2021 and maintaining momentum through the first half of 2022, dealmaking showed signs of deceleration into the first half of 2023. North American deal activity declined by 37% within this time frame, compared to a 45% decline globally1. Both Canada and the United States saw a decline in the total number of deals completed, which fell 29.6% year-over-year in North America and is the 7th consecutive quarterly decline to date2. Please refer to Exhibit A, shown below, for a detailed visual of the US and Canada M&A market activity from Q1 2022 to Q3 2023.

Standout Industries

On the other hand, a few industries, notably the healthcare, energy, and materials sectors, have remained rather stable throughout 2023, mainly driven by their large transaction values1. With the noteworthy all-cash acquisition of Seagen by Pfizer for $43.8 billion, the healthcare sector has remained relatively active due to the continued interest in developing drugs and treatments, which has driven dealmaking activity within this space. Oil and gas and energy companies are focusing more of their resources on M&A activity, placing an increased emphasis on consolidation and diversification into clean solutions. The energy sector realized a total of $51.17 billion in transaction value, placing the industry in second for the most spent on M&A thus far into 20232. Alongside this, the materials sector has been responsible for many large-scale deals in 2023, largely driven by the shift in demand for resources and the price shifts in metals, mining, and agricultural products1.

Q4 Private Equity Landscape 

As with the M&A market, the private equity space has been conflicted with much economic uncertainty causing it to be off to a slow start in the beginning of 2023. Please refer to Exhibit B for a detailed chart of private equity deal activity from 2021 to 2023.

As we head into the ending months of 2023 and as companies gain greater insight into interest rate trajectories and trends in macro conditions, private equity deal activity is beginning to rise3. The current market is experiencing a broad array of deal types5. Sizable carve-outs by corporations seeking to divest present abundant opportunities for private equity firms seeking to become competitive differentiators through their ability to scale and showcase their operational expertise.

 

Deluge in Deal Activity

Historically, private equity deal activity tends to spike in the fourth quarter as companies aim to lock in financing before year-end3. Issuers that successfully get deals into the market during this time have increased odds of closing before the end of the year. The anticipated race to secure financing and get into the market before the surge at the end of 2023 will have a favourable influence on deal activity within the private equity space.

 

Liquidity Conditions

Private equity companies will have adequate liquidity to address their debt maturities4. With recent announcements from the Fed and Bank of Canada signalling that interest rates will steady out, and with inflation continuing to cool in Canada and the United States, the horizon for more affordable refinancing costs looks promising. Due to this, private equity companies will not only have adequate liquidity to address their current debt maturities, but they can expect to enter into markets with healthier liquidity conditions, ultimately improving their financial flexibility.

 

As management consultants tailored towards the middle market, Sapling works closely with private equity firms to offer due diligence services in the form of QoE reports and data ‘slice and dice’ for private M&A situations as well as financial modelling of new investments and follow-on financing deals. Our due diligence and financial modelling services are offered with quick-turnaround and are affordably price for the lower-middle market and enables such firms to be competitive differentiators in their respective markets. Please refer to Private Equity – Sapling Financial Consultants Inc. for more information.

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