Outlook for the Private Equity Industry and M&A in 2024

Judd Appel:

Today. Thanks for having me, Elana. I'm excited to be here.

EMS:

Absolutely. So to kickoff, the conversation. Tell us a little about yourself and how you got to where you are today.

JA:

Yeah, that's a good question. I'm one that started my career as a CPA and after just a couple years, I'd say two years, decided I wanted to do what I really had passion for, which was doing m and a work and was able to steer my career into the m and a world first through working at KPMG, one of the big four firms in New York and got to know the dynamics of doing deal making and then leveraged that into really going to work for that company that I was working a very large deal on. And that's kind of what transformed my career into the world of doing corporate development and m and a type work. So for the last 20 years, I have spent the majority of my career doing m and a work. I've also had some CFO roles and learned a lot about the deal making process and to me, being there and being part of an organization that makes a transaction and then lives with the transaction has been very valuable.

I think it's a good thing to encourage that seeing a deal not just before the deal closes, but staying with the deal for a couple of years after it closes really shows you a lot in terms of things that you learn on integration, things that you learn on synergies, did they work out? Did they not work out? And you learn a lot of lessons and no one's perfect at doing m and a deals, but in the organizations that I've worked with as well as here at Eisner Amper, we learn things every day. And the world of m and a is a place you always learn another thing and try to not learn the things that went wrong. So that's the background of my career. I then went on to spend 20 years at three different industrial conglomerates and then a few years in private equity before coming to Eisner er. So that's my background. I've probably closed, been involved in closing more than a hundred deals in my career, and that leads to you to say probably I've looked at more than 2000 deals over my career. So a lot of experience and looking at new potential opportunities from all facets of the deal. So that's what I've done and here I am today at EisnerAmper.

EMS:

Judd, that was a nice segue into the first question I have for you on our conversation. It's definitely an interesting time right now and the deal making space, the deal's taking longer to complete. Love to hear your overall high level outlook for deal making and m and a activity for 2024.

JA:

Yeah, that's a really good question, Alana. We've probably all heard of the news about deals and deals getting completed, and it's not been a fun market. I'd say the last couple years, the last two years in the world of m and a, if we go back two years, the deal activity is down by about 50%. I'm saying five 0% in total. The middle market's down a little bit less, but by and large, there's been a tremendous decline in the deal activity that's happening in the markets. If we looked at the most recent quarter, and we use PitchBook to really look at the stats because PitchBook is one that got very good credibility in terms of the deals that they include and exclude. We saw the markets decline 20% year over year for the third quarter alone. We are seeing some pick up some sustainability too early to tell here in the fourth quarter.

But I think with the stock markets and the bond markets both having a good last two months of the year, we finished at an incredible level and the s and p 500, the deal market, the m and a market is gaining some strength. Valuations are increasing, which is a good thing. Not that we've had too significant of a decline in valuations, but we are seeing signs of a better deal market. I don't want to say too soon that we're going to have a great year in 2024. Our thought process is in the second quarter we should start to see that, but I think it's going to take a few interest rate reductions to really begin to drive some significant momentum in the markets. And so I don't want to make any promises. People are talking about six rate reductions in 2024. That's kind of a big number to ask for. But we'll see. I think if we get one or two under the belt, I think we will see more and more at traction, particularly on the private equity side where as we all know, debt is a big piece of the transaction. So Outlook is good for 2024, not great, and I think we'll learn more as that as time goes by during the first and second quarter.

EMS:

Judd as a follow-up where you sit in Florida, love to hear some specific deal making trends you're seeing in the state.

JA:

Florida is kind of an interesting market and I think the dynamics have changed here in the last few years with some private equity companies deciding to move down into the particularly South Florida region. There's been a few on the west coast in Tampa, but we're seeing more and more private equity entities and there are reasons for that. Tax is a big reason and just quality of life. I think that it doesn't really matter where you are, particularly in private equity and where you can do a deal from. So if you need to get to the deal, you can hop on a plane, but you could also be in South Florida and join some nice weather most of the year. In Florida though, we look at smaller companies typically, not to say there's not big deals, but we're really focused on the mid cap and the lower end of the mid cap market.

So we see a lot of family owned businesses that are for sale, and those have been doing quite well because buyers have not needed to put as much debt on those deals and they can do it with cash out of pocket or take a small bank loan. So it's not had the impact of doing some of these mega deals that private equity is desiring to do. And that's where the interest rate environment and actually the fact that there's not been a lot of lenders in the private equity market right now, it's just starting to open up. So Florida's a market, I think it's going to continue to grow. We will see smaller deals down here, but we will also see a lot more activity for deals happening in the Florida market, particularly in the middle of the state and definitely in the south Florida region. We're busy in our West Palm Beach, our Fort Lauderdale and our Miami offices all seeing things come up there. But again, smaller deals versus larger deals, but more and more people relocating down to South Florida.

EMS:

Judd, the current macroeconomic environment has clearly presented challenges to deals closing, and I wanted to see if you're able to discuss which macro factors have had the most impact on your clients who recently closed or in the process of closing deals.

JA:

To say in general, I would say it's interest rate driven. We see movements in bond market and we see movements in stock market typically when we see interest rates and the stock market tends to lead in terms of our thinking about where things are going to be in the next three months, six months or 12 months. And I think that was the case here at the end of 2023. We have seen a good pickup in demand, although we haven't seen any decreases in interest rates yet, but I think the markets are set for that to happen here, starting in probably the late end of the first quarter, 2024, and then increasing during the year. One of the things that we look at is multiples that businesses are trading at, and I think that there's an opportunity now with the decline in valuations over the last couple of years.

If we think about going back to 2021, and again, this is PitchBook data deals we're trading at about 10.7 and that's as a whole, that includes all sectors, that includes different regions, but they were trading around 10.7 and now they're down to about 8.7. So we're seeing close to a 20% decline in valuation, which is attractive for buyers, whether they're financial or strategic buyers. So I think that's really starting to drive some more activity in the markets, and that's really been driven down by interest rates and the ability for buyers to capitalize on funding these investments and doing what they need to do to make things happen. So we think with that, as soon as we start to see interest rates go down, hopefully it'll be here in the first quarter, we'll probably see those multiples creeping back up, but I think we'll probably land at the end of this year around a 10 times EBITDA multiple.

EMS:

What about valuations? How are those been impacted by the macroeconomic client?

JA:

Yeah, I mean, as I said, they're down about 20% in terms of where you could buy things, even if you, I'd say it's 18 months to two years ago, prices are down about 20%, but there's other factors that come in and it depends what kind of business that you're looking at. Most businesses on the operation side have done rather well in 2023, and that was kind of the big driver to the markets at the end of the year. So I think that there's a lot of sentiment in a good way, a very positive sentiment as we go into the beginning of the year. Today, maybe it wasn't the best day, the stock market, but we don't want to look at one day alone. We want to look at a broader period of time. And I think that there's a lot of momentum with interest rates. Hopefully we will get a couple of these war situations ended sooner rather than later. And I just think that overall we're starting to see inflation decline. We've definitely seen inflation decline and this'll help with a lot of things, including the home market. Home market stayed pretty strong because there's a lot more demand out there than there is supply. But we'll see what happens as interest rates change this year, but we're looking for valuations to slightly increase in 2024, not significantly, but maybe about 1% or one turn on EBITDA in 2024.

EMS:

That's a nice follow up to the next question. I have love to hear what trends you're seeing with respect to purchase prices in EBITDA for 2024.

JA:

Yeah, I mean, I think you got to look at the buyer sets as well. We work with a lot of individual families that are selling their businesses. We work with some corporates and we worked with some private equity. I would say that those that have been most successful in the last 12 months have really been the corporates and also some of the individual family owned businesses. I think it's been tougher for sponsors, private equity sponsors, whether it's an independent sponsor or whether it's a private equity group, to find the value in these deals. And you got to look at all the dynamics. You got to look at valuation, as we just talked about. You got to look at success of the business during a downturn in the markets. But I think that overall, we're going to continue to see good momentum. I think the corporates have the hand up right now because they have cash on hand and they have other ways of doing sophisticated ways to finance deals. And so I think that that shift is going to start to happen here sometime in the first half of 24, where we'll see more and more other types of buyers, including private equity, begin to find lending and some banks easing up on some of the restrictions around that. So I think it's going to be a good 2024, and I think a lot of that is contingent upon private equity, being able to come back into the market and find debt that's semi reasonable to make the deal metrics work for those companies.

EMS:

Judd, what is one piece of the advice you have for companies both contemplating buy side and sell side transaction?

JA:

Yeah, that's a good question. I would say be patient. I would say that the deal process has taken a lot longer in 2023 than it had in the past. Some of that's due to the uncertainty. Some of that's due to people trying to make sure that they're covered in every different way that they can be in this kind of uncertain market that's been out there for the last six months. I think we're seeing a lot of encouragement in the last couple months. We're seeing the stock market, as I said, much, much stronger, finishing almost at an all time high at the end of the year. So my suggestion, recommendation is take your time, make sure you look at all the risk elements that are out there. You never know when there's something that can bite you at the end of the deal. So take your time. You're not going to be the only ones out there that are taking your time. I don't think you need to be aggressive and the leverage isn't there and there today for private equity, so you've got a little bit of time to wait. So I'd say just be very careful as private equity does and most buyers do, but I say take your time and make sure you hit all the risk factors and make sure that you're in good shape as we enter into 2024.

EMS:

Judd ESG has been top of mind the last several years and wanted to see how that plays a factor, if at all, into evaluating companies.

JA:

Yeah, that's another good question, Alana. We have seen some ESG coming into some of our deals, but again, we're typically involved with deals in the middle market, non-publicly traded companies. Some of our deals are very small. We do really small deals and we do some large deals too. You're seeing the ESG presence much more in the, I'd say in the mega deals where these things are required and they're not just required because they want to be a pain to corporates and things like that, but they're actually trying to drive better efficiencies, better cleanliness, better practices, and we'll continue to see it. We'll continue, I think to have more presence in our ESG in our company. It's becoming a bigger factor, and I'd say mainly in the larger deals that we've looked at and the larger companies that are publicly traded, it's an essential, I mean, there's no reason that anybody should be ignoring the whole ESG, environmental, social, and governance, all really important things. We're seeing less of it in what we do on an everyday basis, but I think we'll see more as we enter into 2024

EMS:

Judd. We've covered a lot of ground today and wanted to see if there are any final thoughts you'd like to share with us.

JA:

Be aware of what's happening in the markets. I think there are some value oriented deals out there that people are looking at things that we're trading at eight times now, trading at five times or even four times. So look at value oriented deals. Still a good place to be in this market. So that's one place I think that look at certain sectors. I think the financial services sector is an interesting one right now where some of the prices on these firms have come back a little bit, but they're nowhere near where they were before. So particularly on the second tier banks. So the financial sector seems to be a good place to look. And the other place I think is healthcare. Healthcare was not so good in 2023. Again, PitchBook said it was down about 40% year over year when we look at the third quarter.

But healthcare is not going away. There's lots of changes that are going to take place, and we're not going to get caught up in what all those little sophistications are. But if you've got experience in healthcare, now's a good time to really take a deep look at some of those assets because there's some significant transactions. I think that there's a few that are been announced here in the fourth quarter, but I think there's going to be a good number as we enter into the new year. So that's what I would leave, I would say value, value oriented deals. Look at the financial services sector, and I think healthcare is looking very good as we go into the new year.

EMS:

Judd, I want to thank you so much for sharing your perspective with our listeners.

JA:

Well, Elana, thanks for having me. Hopefully this was helpful to others and hopefully they appreciated some of the discussion.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.

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