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Advisors, Private Equity

6 Things the Market Gave Deal Professionals This Year

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Just hear those sleigh bells jingling…

This Christmas Eve, here are some of the gifts — and lumps of coal — bequeathed upon deal professionals and business owners in 2015.

1. A U.S. recovery (albeit slow)

The Conference Board predicts “a very modest improvement in the growth rate for the global economy to 2.8 percent in 2016, up from 2.5 percent in 2015.” But the U.S. is a “bright spot in a weak global economy.” The economy expanded at a 2.1 percent rate in Q3 (compared to 3.9 percent in the spring).

It may be a “tortoise recovery,” as Goldman Sachs chief economist Jan Hatzius puts it, but “growth in fact has been good enough to achieve a great deal of cumulative progress in the labor market. We now expect that the U.S. economy will reach full employment within the next 12 months.”

2. Nearly $5 trillion in deals

It was a record-breaking year in M&A, with $4.86 trillion of deal volume overtaking 2007’s previous high. Reports Fortune, “dealmakers used consolidation to uncover cost cuts, bolster their scale, and take advantage of historically low borrowing costs.” Even with increased interest rates, “money is still cheap,” and many predict that M&A will continue to accelerate in 2016.

3. … but still plenty of dry powder

According to Firmex, the North American market currently has about $400bn of dry powder. Sky-high valuations mean that some buyers, particularly PE sponsors, are reticent to close deals. Reports Firmex, “A few years ago, 80% of the market was PE-backed. Now our stats show that M&A activity for PE sponsors is closer to 45%.” A smaller supply of target companies doesn’t help: Despite predictions that 2013-2015 would be the peak of the baby boomer selling boom, middle market business brokerage firm listings are actually down in many areas.

4. An interest rate hike

Up to now, “the market has been driven by factors such as the low cost of financing — primarily as a result of low interest rates,” says Jerry Black, partner at Akerman, in a recent report from Firmex. But now that the Fed has decided to raise interest rates for the first time since June 2006, will economic expansion end? The New York Times notes that “higher interest rates do not bite in predictable ways” and “there is a difficult-to-foresee threshold at which the impact can suddenly shift from mild to severe.”

According to Western Reserve Partners LLC, “while this change will take time to affect middle-market M&A transactions, it will impact buyers’ cost of capital and ability to utilize leverage to maximize enterprise values and equity returns.”

5. New rules for crowdfunding

The SEC recently expanded implementation of the JOBS (Jumpstart Our Business Startups) Act. As Brooks Crankshaw wrote in a recent Axial Forum article, the expanded legislation allows “investors with annual income or net worth of less than $100,000 to invest in small company equity offerings up to a maximum of 5% of their yearly income or net worth (or $2,000 if that is greater.” While some assume that this will take business from private equity and other market participants, Crankshaw argues that “it’s likely [these new rules] will increase the total market amount of funding rather than replacing or reducing more established ways to raise capital.”

6. Mega-mergers galore

There were more mega-mergers this year than ever before, reports Bloomberg, with 56 transactions totalling over $10 billion. Last year, there were 34 mega-mergers, and in the five years before that, the number never totalled over 16.

The jury’s still out when it comes to the effectiveness of mergers. “The idea management teams have been pushing is that merger synergies will lead to stronger companies,” Bloomberg notes. But the failure rate for mergers hovers somewhere between 70% and 90%, according to the Harvard Business Review.

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