The lessons we may traditionally have taken to move forward with business deals in past years are being adjusted in today’s environment. Market dynamics have now become more nuanced and fluid.
Resurgence appears to be last year’s key takeaway. Deal activity in 2024 is expected to grow significantly based on more predictable financing markets, although larger deals will likely either move to private credit or undertake full equity funding to echo the buyout stability offered by strategic bidders.
The resurgence will not be only one-way, but with overall leverage and valuation levels likely lower than in 2021. Instead, the credit markets expect to see continued interest, covenant and other relief amendments, and even refinancings where existing lender groups have damaged relationships with borrowers and sponsors.
Can we expect a sudden influx of initial public offerings in reopened public markets? That hope may be a little farther away as the more certain dry powder that is deployable remains at record-high levels.
2023 Lessons
One main feature of 2023 was caution. In an unpredictable market, it’s much harder to have the same levels of conviction, because more things can cause problems—such as interest rates, inflation, and global conflict potentially impacting customer markets for a particular business.
That caution led to increased levels of diligence, careful risk-adjusted structuring, and more trepidation around valuations. It also led to reduced levels of transactional activity, although this improved significantly as the year went on.
Will 2024 represent continuance, nascence, or some combination of the two?
Expectations
Our first expectation is a continued resurgence in deal activity. Many investors have aimed to build pipelines and focus on the right risk profile for their strategy. The market now also benefits from more historic information on interest rates and earnings, providing a more stable environment for properly determining valuation—and a likely return to a more stable or even improving interest rate environment.
In addition, the continued and growing deployment of meaningful capital from private credit has seen a huge uptick since 2018. This will help consummate newer deals and feed into the significant number of private credit maturities to be worked through, which will stimulate activity.
The growth in market confidence should combine with these factors to help drive healthy activity levels in the first half of 2024. However, we shouldn’t completely ignore the current macroeconomic climate. There may also be a considerable gap to be plugged by junior capital, as refinancings will require a high level of leverage relative to current senior secured risk tolerance.
Second, caution will remain. It’s abundantly clear the investment community is doing what it can to limit the risk of getting it wrong.
But parties are very keen to transact and do so with vigor. We see that both within the large cap space with deals such as Constantia Flexibles GmbH and Adevinta ASA in Europe and Qualtrics International Inc. and Worldpay Inc. in the US, but also in the mid-market, where deal volumes are ever increasing.
The market has also seen an uptick in industrials and health-care mergers and acquisitions, both of which were somewhat muted in the first half of 2023—suggesting that sectoral or vertical fears continue to subside.
There has been significant exit chatter around IPO markets that are expected to reopen somewhat. Despite that and the fact some legislators are relaxing the rules around admission to the public markets, the sheer amount of available private capital will make the IPO markets a challenging foray versus trade and private equity exits, particularly given the underwriting uncertainty.
In many ways, this is an echo of how markets have turned to private credit instead of broadly syndicated debt markets, despite the cost of capital and additional flexibility the latter has been known to provide. Deal certainty and valuation appear to be the critical path items for buyouts.
Finally, private credit is set to continue its dominance of the leveraged space and beyond. Despite reports of a wider, slower fundraising environment, credit funds continue to raise record-breaking funds and to finance record-breaking transaction sizes, breaking jumbo deployment records three times in the last 18 months.
In particular, the market expectation that only clubbed private credit deals could finance larger transactions has waned, with one or two credit funds often providing the entire financing structure for jumbo transactions. Interestingly, the heightened interest rate environment hasn’t slowed this dynamic at all—at the expense of the broadly syndicated market, where reduced activity levels are expected to continue.
With junior capital expected to play an increasing part in financing markets, this also helps underscore the dominance of credit funds, whose many special opportunities or equivalent funds are well-placed to grab market share.
Overall, 2024 appears set to be a year of slightly fewer unknowns. Whether through a global pandemic, global conflict, or global recessionary and interest rate dynamics, the last three years have featured a significant amount of unpredictability.
Being able to look back with more data and predictability provides a strong basis for returns to high activity levels, with or without a revisionary mindset. And in global markets punctuated with private capital, periods of inactivity are often followed by a meaningful rebound, especially given the levels of dry powder in the system.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Harris C. Siskind is partner and global head of the transactions practice group at McDermott Will & Emery.
Aymen M. Mahmoud is partner and co-head of the London finance, restructuring and special situations group at McDermott Will & Emery.
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