By all measures 2018 was a busy year for the M&A industry. M&A volume in the U.S. reached a near-record pace through the first three quarters of 2018, with $1.3 trillion in deals announced — a 50 percent increase in activity compared to the first nine months of 2017. On the private equity front, activity remained strong as well. The first three quarters of 2018 saw 3,501 deals completed for a total of $508.8 billion, according to Pitchbook. Additionally, in the first three quarters of 2018, private equity firms raised $121 billion for investment.
As we turn our attention to 2019, Middle Market Review asked readers what their expectations are for the new year. Most survey respondents believe M&A activity in 2019 will increase, citing the booming economy, baby boomers’ need to sell businesses, expanding GDP, and a lower barrier to growth given the more favorable business environment promoted by the Trump Administration. What’s more, corporates have increased cash, in part due to tax reform, and M&A is high on their priority list. Private equity firms have lots of dry powder as well.
The responses from Axial’s readers were in line with Deloitte’s The State of the Deal M&A Trends 2019 Survey. According to Deloitte’s survey, about 80 percent of respondents expect the average number of deals they close on to increase over the next year. Additionally, 70% expect that the size of those transactions will be larger than the ones brokered in 2018,
The Deloitte survey, which surveyed 1,000 U.S.-based M&A and private equity professionals, also found that corporates are now focused on acquisitions that will expand their customer bases in existing geographic markers or expand and diversify their products and services, which is a shift from when they were focused on acquisitions that gave them more technological capabilities last year.
As Axial readers look to 2019 there are many reasons they are optimistic including more baby boomers looking to sell and opportunities for distressed deals. Warren Feder, a partner with Carl Marks Advisors, says he is optimistic for the same reasons. “We have good deal flow. We have a number of family businesses and baby boomers that are looking at their liquidity options. Some want exits other want to take some chips off the table,” says Feder. “There aren’t big opportunities in distressed right now, but there are some and there is a lot more interest in those funds.”
Although the outlook for 2019 is strong dealmakers are not worry-free. Middle Market Review readers worry about a lack of quality deal flow and rising interest rates. The Deloitte survey says that global economic uncertainty is the No. 1 obstacle to M&A. However, rising interest rates was also concern with 41 percent of all respondents to the Deloitte survey saying that rising rates will slow their activity or reduce their ability to execute on deals. “It’s without question that has interest rates go up and the stock market become more volatile the atmosphere for investment becomes less stable,” says Feder.
Probitas Partners also completed their annual Private Equity Institutional Investors Trends for 2019 survey recently and says that investors’ fear going into 2019 is that too money is coming into private equity.
Still, overall investors are going into 2019 ready to have another strong year. “From the LP standpoint, the private equity industry, particularly the middle market remains strong and will keep expanding. Proven managers will continue to have success in 2019,” says Kelly DePonte, a manager partner with Probitas Partners.