You may have noticed that 2023 was a slower year for mergers and acquisitions, but here’s some good news: we at PCE anticipate a strong rebound in M&A transaction volume for 2024. Key metrics point to a healthier environment for dealmaking as the new year progresses, with easing interest rates, record levels of private equity “dry powder” (committed equity available to finance transactions), strong GDP growth, and improved consumer sentiment all expected to boost deal volumes relative to last year. Our conversations with various service providers, private equity groups, and strategic buyers—in addition to our own pipeline activity and deal backlog—corroborate this view.
Here’s our take on the economic landscape we’re leaving behind—and on the changing environment you can expect in the year to come.
2023 vs. 2024: A Market Reset
Coming off a handful of extremely strong years for M&A activity, buyers and sellers had to adjust to a “new normal” in 2023 regarding how deals could be financed and what impact that would have on valuation. Announced global M&A volumes through the third quarter fell approximately 20% YOY to ~$3 trillion, driven largely by significant economic uncertainty and higher interest rates. The result: acquisition financing grew more expensive, particularly for private equity groups, leading to stagnation and a lack of urgency around moving forward with transactions. (1)
As we enter 2024, greater consensus on the positive economic “big picture” is creating more stability, which favors M&A activity. Already in 2024, we are seeing intensified interest among sellers who previously were hesitant, indicating that mindsets have adjusted to last year’s market reset.
Increasing Optimism, Not Interest Rates
The Federal Reserve has held the fed funds rate steady over the past three meetings and has alluded to three potential 25 bps rate cuts in 2024. More cuts are to follow in 2025 and beyond, all of which bodes well for dealmaking. This is after an interest rate cycle that saw the Fed hike its key interest rate 11 times since the beginning of 2022, from a target of .25%-.50% in March 2022 to where it currently sits at 5.25%-5.50%, which is the fastest tightening cycle in four decades. (2) This significant rate increase over just two years—compounded by apprehension about more potential hikes—was a large driver of uncertainty in the M&A market, particularly for private equity groups that rely on debt to finance transactions.
As inflation continues to subside and interest rates temper, fears around a potential recession have begun to fade—contributing to renewed optimism regarding M&A for the coming year.
Private Equity Cash: Ready to Work
Private equity M&A activity was relatively subdued in 2023, with global PE deal value declining 35.6% as of November 30 compared with the same period in 2022. In our view, rising interest rates and the associated increases in the cost of debt, combined with concerns earlier in the year around a possible recession, caused most of this decline—leaving PE groups flush with cash and needing to put that money to work. Globally, private equity dry powder stood at $2.6 trillion as of December 1, 2023, an 8% increase over the prior year and the highest level ever recorded. (3)
With a more optimistic economic outlook for 2024, pressures to invest available dry powder should drive an upturn in PE acquisition activity over the coming year. Indeed, our conversations with private equity groups are marked by a notable increase in optimism and a renewed focus on finding quality acquisition opportunities.
Consumers: Eager to Consume
Consumer sentiment improved significantly in December 2023, with the index surging 14% over November to 69.4 as consumers reacted to better-than-expected inflation data and to the Fed’s comments about potential interest rate reductions going into 2024. (4) Third-quarter GDP grew 4.9%, with the US economy continuing to perform better than most expectations. At PCE, our sense is that consumers are finally internalizing positive data around inflation, surprisingly strong economic growth, and a softening interest rate environment. When consumers feel better, they spend more, which is good for businesses in virtually all sectors and bodes well for M&A activity.
What Are Your Options for 2024?
Both the evidence and overall sentiment point to a growing optimism for a recovery from the subdued M&A volumes of 2023. The market outlook for 2024 holds promise, marked by a convergence of greater stability and more favorable conditions, which set the stage for amplified deal activity. We expect private equity groups, with substantial dry powder and a steadier economic outlook, to drive activity in the broader M&A markets.
As consumer confidence continues to improve, fostering increased spending, businesses will feel better about pursuing strategic M&A transactions in 2024. Contact PCE when you’re ready to consider available deal options that could benefit your business in the year ahead.
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