4 Deal Sourcing Trends Shaping 2023

The coming year is unlikely to see a marked departure from the deal sourcing tactics of 2022.

Instead, private equity business development professionals and other industry participants point to trends that they expect to gain greater traction in 2023, including creative approaches to marketing, new technology applications, increased enthusiasm for smaller deals and an earlier start to relationship-building.

Technology is a must-have in dealmaking, but when it comes to deal sourcing tech, not all acquirers find themselves in the same place on the adoption curve. In a shifting M&A landscape, corporates and financial investors may have significantly different tech adoption experiences in 2023.

Nevin Raj, chief operating officer and co-founder of private company intelligence engine Grata, says a growing disparity between corporates and PE firms may lead to one of the most poignant trends in tech adoption next year.

“What we see is that (PE) investors, especially early-stage tech investors, tend to be some of the first adopters of technology,” notes Raj. As a result, those investors tend to embrace technology within their deal sourcing workflows, too. In contrast, corporates are “actually the furthest behind” in the adoption curve, he adds.

Global M&A market – what happens next?

The global M&A market remained resilient in 2022 despite unprecedented uncertainty, according to a new report from global broker WTW. The report found buyers outperforming the wider market as recently as the third quarter, based on share price performance and completed deals.

However, deal volume slowed significantly in 2022 compared to last year’s record pace. Multiple factors have impacted M&A this year, including geopolitical turmoil, skyrocketing inflation, climbing interest rates and worries about a global recession. These issues are expected to continue into next year, making it more difficult for buyers to predict the profitability of potential targets, WTW said.

“An unprecedented number of disruptive forces have created headwinds for dealmakers, but they are also generating opportunities,” said Massimo Borghello, head of human capital M&A consulting, Asia-Pacific at WTW. “The fundamentals that drive dealmaking are still in place and, with valuations moderating after the historic levels reached in 2021, strategic and financial buyers alike will take advantage of better-priced opportunities for growth.”

Why Due Diligence is Critical in the Reshaping of Global Supply Chains

Merger and acquisition (M&A) due diligence is the process of investigating a target company before entering into a merger or acquisition agreement. It typically involves a thorough review of the target company's financial, operational, and legal affairs to identify any potential issues or risks that could affect the value of the company or the viability of the deal.

The purpose of M&A due diligence is to provide the buyer with a clear understanding of the target company's strengths and weaknesses, and to help the buyer make an informed decision about whether to proceed with the deal. It is an important step in the M&A process, as it helps to protect the buyer from potential unknown liabilities or problems that could arise after the deal has been completed.

M&A due diligence typically involves a number of different activities, including reviewing financial statements and other financial documents, analyzing the target company's operations and market position, and reviewing legal documents such as contracts and intellectual property agreements. It may also involve interviews with key personnel, site visits, and other forms of investigation.

M&A due diligence is typically led by a team of experts, including financial analysts, lawyers, and industry experts, who work together to evaluate the target company and identify any potential risks or issues that could impact the deal. The results of the due diligence process are typically presented in a due diligence report, which outlines the findings and recommendations of the investigation.

Dealmaking is back on the table for private equity firms focused on Asia. After the biggest global health emergency in more than a century put an almost complete stop to in-person site visits and meetings, executives are once again seeking opportunities where they can see potential for transformation and profitable disposal in the future.

Getting products from design and manufacturing and into markets along secure distribution routes will always be a key requirement for companies no matter what economic and geopolitical storms they may have to adjust to. This focus on distribution is heightening the interest in deals for companies that make supply chains work.

For example, according to research from global law firm K&L Gates, there were 53 PE deals involving logistics and supply chain in the U.S. from the beginning of the year up to August 2022 worth a total of $20 billion. This compares to $7.9 billion in 2020, and $5.1 billion in 2019.

11 Best Sectors To Invest In Heading Into 2023

With a recession on the horizon, many investors are cautious when it comes to putting their money in the equity market. However, although the S&P 500 is in bear territory, there are some sectors which are performing better than the others. In 2022, safe haven assets and defensive market sectors like utilities, healthcare, consumer staples, and gold have outperformed relative to the overall US market. The energy sector has also gained close to 50% year-to-date due to the Russian invasion of Ukraine.

Although defensive sectors are considered to be more lucrative investments heading into a recessionary environment, if the central bank manages to slow down interest rate hikes after achieving about 5.0% to 5.5%, then technology and high growth stocks can potentially recover. If that is the case, technology and semiconductor sectors are some of the ETFs that may outperform based on the sector rotation model.

Investing in exchange traded funds allows investors affordable access to legacy large-cap firms like AbbVie Inc. (NYSE:ABBV), NVIDIA Corporation (NASDAQ:NVDA), and ServiceNow, Inc. (NYSE:NOW).

Smaller deals gain favor as private equity pros look toward 2023

There are a few reasons why private equity firms might be more focused on smaller deals:

1. Risk management: Smaller deals tend to be less risky than larger ones, as they involve a smaller investment and therefore a lower potential for loss.

2. Greater potential for return on investment: Private equity firms typically aim to achieve a high return on investment (ROI) for their investors. Smaller deals may offer a greater potential for ROI, as there is often more room for growth and improvement in smaller companies.

3. Easier to manage: Smaller deals may be easier to manage, as there is often less complexity and fewer stakeholders involved. This can allow private equity firms to more effectively implement their strategies and realize value from their investments.

4. Access to a wider range of opportunities: Private equity firms may also be more focused on smaller deals simply because there are more of them available. With a wider range of opportunities to choose from, private equity firms may be more likely to find deals that align with their investment criteria and goals.

Middle-market private equity pros expect to see a preference for smaller, tuck-in acquisitions of companies instead of bigger, signature platform purchases as the world of mergers and acquisitions eyes a more uncertain dealscape in 2023.

Tighter credit is one reason for this pivot toward buy-and-build strategies for growing companies, along with a gulf between the that price sellers want to get for the companies and what buyers are willing to pay in private markets.

“Private equity firms want the most the market is willing to pay for their trophy assets, so they won’t sell them in this market,” said Graham Weaver, CEO and founder of Alpine Investors, a specialist in software- and services-company deals.

Private equity outlook in the face of macroeconomic headwinds

Private equity fund performance has been unprecedented in recent years, with returns generally outpacing public markets. However, current economic conditions have posed considerable challenges for the industry.

Factors such as high inflation, the ongoing supply chain crisis, ballooning interest rates, and the war in Ukraine have all contributed to a decrease in deal volume and lower overall equity valuations for sellers.

Those lower valuations, coupled with the high cost of debt, have made private equity M&A transactions less appealing to private equity firms. Although many firms have plentiful cash reserves and will likely put them to use in M&A where possible, difficulties in raising funds from investors may make even that alternative more challenging. In these challenging times, it is crucial that every investor have an expansive view of all aspects of a target — the tumultuous market alone is risk enough.

Outlook 2023, Private assets: three areas of focus in challenging times

“In 2023, private asset investors face a complex mix of challenges and risks,” says Dr. Nils Rode, Chief Investment Officer at Schroders.

The likelihood of a prolonged recession is significant. Inflation is high. Interest rates are rising, while overall debt is elevated. The war in Ukraine continues, as does the resultant energy crisis. Even if these factors disappeared overnight, ongoing issues like social inequality and populism remain.

Nevertheless, private assets are long-term in nature. It’s more appropriate that investors assess the medium-to long-term outlook before making any decisions. Over this longer timeframe, numerous durable, long-term trends mean we remain optimistic.

There are a few potential reasons why someone might consider investing in private assets:

1. Potential for higher returns: Private assets, such as private equity, venture capital, and real estate, can potentially offer higher returns compared to publicly traded assets, such as stocks and bonds. This is because private assets often involve a greater level of risk and uncertainty, and investors may be willing to accept a higher potential return in exchange for that risk.

2. Diversification: Investing in private assets can also help diversify an investment portfolio, as the performance of private assets may not always be correlated with the performance of publicly traded assets. This can potentially help manage risk and increase the overall stability of an investment portfolio.

3. Control and influence: Investing in private assets can also provide investors with more control and influence over the companies in which they invest. For example, an investor in a privately held company may have a say in the company's management and strategic direction.

It's important to note that investing in private assets carries its own set of risks and challenges. Private assets are often less liquid and harder to value than publicly traded assets, and they may be subject to additional regulatory requirements. It's important to carefully consider the potential risks and rewards of investing in private assets before making any investment decisions.

Picking Up the Pieces: The Corporate Carve-Out Opportunity

As deal activity ramped up in the past two years, both buyers and sellers found increasing M&A opportunities in corporate carve-outs.

Dealogic reported that 9,155 carve-out transactions worth $2.3 trillion were announced globally last year, a 67% increase in value over 2020. An expanding economy, rising company valuations and eager private equity buyers looking to make up for lost time contributed to the surge.

A corporate carveout is a process by which a company spins off a subsidiary or division into a separate, independent company. This can be done for a variety of reasons, such as to raise capital, to focus on a specific product or service, or to allow the newly independent company to pursue strategic opportunities that may be outside the scope of the parent company's business.

In a corporate carveout, the parent company typically retains a minority stake in the newly independent company, which can be sold to other investors at a later date. The newly independent company may also be listed on a stock exchange, allowing the public to buy and sell shares in the company.

Corporate carveouts can be complex transactions, involving the transfer of assets, employees, and intellectual property from the parent company to the newly independent company. They may also involve the renegotiation of contracts and the restructuring of debt. Careful planning and execution are critical to ensure that the carveout is successful and benefits both the parent company and the newly independent company.

A corporate carveout is typically done as a means of restructuring the parent company or as part of a divestiture strategy. Corporate carveouts can take a variety of forms, including spin-offs, split-offs, and divestitures.

In a spin-off, a business unit is separated from the parent company and becomes an independent entity, with its own management team, board of directors, and shareholders. A split-off involves the creation of a new company that is owned by the shareholders of the parent company, with the business unit being transferred to the new company. A divestiture involves the sale of a business unit to an external buyer.

Corporate carveouts can be motivated by a number of factors, including the desire to focus on core business operations, to raise capital, to unlock value for shareholders, or to improve operational efficiency. They can also be used to separate businesses that have different growth prospects or that operate in different industries.

Recession Anxiety? Not in the Credit Market

“The corporate debt market is still doing its part to keep America out of a recession,” says Jonathan Levin | Bloomberg.

As economists and yield curve indicators warn about a potential downturn in 2023, the signs of any kind of credit panic remain conspicuously absent from primary issuance markets and corporate spreads. Amazon.com Inc. is among 19 investment-grade companies that sold bonds this week, closing out November at about $104 billion in issuance, according to Bloomberg Intelligence data, in what’s typically one of the last spurts before bankers and investors start checking out for the winter holidays.

UK M&A activity for Q3 at lowest level since 2012

“UK dealmaking experienced its slowest third quarter in a decade, according to an Experian Market IQ report,” says Laurence Kilgannon, Digital News Editor at the Insider Media Limited.

There were 1,357 deals announced - the lowest third quarter total since back in 2012.

In the year to date there have been 4,782 transactions across the UK in the first nine months of the year, down by 14 per cent from the 5,553 deals announced over the corresponding period of 2021.

ANALYSIS: 2023 M&A Market May Reveal a Return to Pre-2021 Levels

The Bloomberg Law 2023 series previews the themes and topics that our legal analysts will be watching closely in 2023. Our Transactional analyses explore the trends and forces shaping key markets of interest in the year ahead.

As we approach 2023, the mergers and acquisitions market continues to be described as “slow” and “uncertain,” and those trends are likely to continue into the new year.

Despite this outlook, the 2023 deal forecast may not be as dreary as some predict. M&A activity in 2021 reached historic levels, and it’s hard to beat records year after year. So 2023—even if slower than 2022—could represent a return to normal in the M&A market.

Private Equity Firms Expect Middle-Market Dominance in 2023 as Monetary Tightening Drives Deal Volumes and Values Down, Yet Fundraising Still Outstrips Pre-Pandemic Levels

Rising leverage costs and volatile valuations driven by economic downturns and increasingly tight monetary policy are the greatest challenges facing the private equity industry, according to the 2023 Dechert Global Private Equity Outlook report.

The US, like other regions in 2022, saw the PE buyout market shift down a gear, with the number of transactions in the region declining by 15% and their aggregate value sinking 43% in the first nine months of the year, compared to the same period in 2021. In the US, the number of buyouts across this period totaled 2,081 with a value of US$333.4bn. Among PE leaders, this trajectory is expected to continue into 2023 and beyond, driven by tightening credit conditions and broader economic dislocation. On the bright side, the market share of buyouts as a proportion of overall M&A activity continues to grow with the percentage share approaching 25% in the Americas through Q3 2022, according to data from Refinitiv.

More than 40% of US respondents said valuation and economic uncertainties were among the top two challenges the PE industry faced. The data, published today, in association with Mergermarket, surveyed more than 100 senior-level executives within PE firms based in North America, EMEA, and Asia-Pacific (APAC). This is Dechert's 5th annual Global Private Equity report.

Despite this, the global volume of transactions remained surprisingly robust. General Partners (GP) remained highly active on all but the largest transactions: "There is always something going on in the middle market, whether it is new platform deals or add-on acquisitions. Even though the amount of capital being invested has fallen, private equity has really demonstrated its resilience," said Dr. Markus P. Bolsinger, co-head of Dechert's global private equity practice and partner in the firm's New York and Munich offices.

M&A Demand Stalls Out In Home Health Care, Declines In Personal Home Care

Coming down from a high the past two years, home-based care M&A saw a bit of slowdown in the third quarter of 2022. That’s according to a recent report from Mertz Taggart.

The report is an overview of the dealmaking activity that took place across home health, home care and hospice in Q3.

The decline in transactions is a result of fewer companies going to market in 2022, compared with 2020 to 2021, Mertz Taggart Managing Partner Cory Mertz said in the report.

“Transaction volume from late 2020 through 2021, relative to historical periods, was up almost 40%,” he said. “This was driven by sellers trying to get their transactions closed before the then-pending capital gains tax rate increase. This never came to fruition, but the threat has loomed since the current administration took office, only subsiding in early 2022.”

5 Trends that Will Drive the MSP Market in 2023

As 2022 ends, MSPs are assembling their plans for 2023. The plans that work will tap into trends that are developing over the next 12 months. What are they? Here are five major trends that will shape the MSP market in 2023.

1. Consolidation will be top of mind 

2. Inflation will cause a rethink of data center investments

3. Data recovery will be in demand

4. CRaaS will present an enormous opportunity

5. Data tiering will be top of customer to-do lists

As financial markets dampen RIA valuations, buyers get creative with deal structures

A report from DeVoe & Co. shows dramatic drop-off in fourth-quarter deals, but the biggest buyers say they are as busy as ever.

With just three deals during the last three weeks of October, an 81% drop from the monthly average of the last 12 months, and a similarly sluggish outlook for the November, the writing is on the wall, said David DeVoe, founder and chief executive of the research firm.

“The wheels fell off the M&A train in early October,” DeVoe said. “2022 delivered three quarters of unexpectedly strong activity, given the market environment. High interest rates, a declining stock market and a challenging economic environment typically drive down M&A. It remains to be seen if these pressure points are creating a short-term lumpiness of volume or a sustained downturn.”

Key Aspects of SAAS Revenue Recognition and M&A Due Diligence

Cloud-based software-as-a-service business models are enabling rapid growth in some of the most innovative software-service companies. As technology companies evolve to meet market needs, the accounting and financial services industry must also adapt to address investor needs for financial reporting, business valuation, M&A transaction due diligence, and dispute resolution.

Four of Stout’s service groups discussed the key aspects of SaaS revenue recognition. Steve Sahara, director in Stout’s disputes, compliance, and investigations practice, interviewed Jeremy Krasner, managing director in the valuation advisory practice; Brad Burch, managing director in the accounting and reporting advisory practice; Kevin Pierce, managing director in the disputes, compliance, and investigations practice; and Joe Randolph, managing director in the financial due diligence practice of the transaction advisory group.

“The SaaS model provides customers with many benefits, and it has been a strong performer for investors. Certain SaaS businesses, or at least those with high revenue, have historically delivered revenue growth in excess of 30% but with cash flow margins of negative 20%, as well as significant research and development and sales and marketing expenditures. Over the past five years or so, the higher-revenue-growth companies were rewarded with higher valuation multiples despite the negative cash flow,” says Jeremy Krasner, a managing director in the valuation advisory group at Stout and is the Tysons Corner office leader.

Deals Done Efficiently: Four Things M&A Advisors Need to Know

Consideration of both pre- and post-closing deal requirements creates a more holistic client experience. While M&A advisors (and their clients) may not be thinking about closing mechanics and post-closing matters now, doing so can help drive efficiencies, ensure a smoother close, and remove added work and headaches later in the deal process. SRS Acquiom offers these tips to help you provide more value in your role as an M&A advisor.

“M&A advisors play a pivotal role in managing the deal process and can be essential in navigating the elements of a transaction across its lifecycle—striving to ensure all parties arrive at closing as efficiently as possible. In private M&A transactions, the client’s journey doesn’t end at the deal closing. Issues with working capital adjustments, earnouts, escrow releases, and potential claims can cause the M&A post-closing mechanics to play out for quite some time. Considering these kinds of post-closing challenges earlier in the deal can help drive efficiencies and remove added work later in the deal process. Based on our experience servicing more than 6,300 deals with an aggregate value of more than $775 billion, the team at SRS Acquiom presents the following information to consider on your next transaction,” says Paul Koenig, CEO and Co-Founder, SRS Acquiom.

The Big Picture: 2023 M&A Outlook

A look ahead to the key strategic trends expected to impact the overall M&A environment and some key sectors, presented by S&P Global.

“The volatile equity markets, rising interest rates and economic uncertainty have weighed on M&A activity. The lower equity valuations have reduced buyers’ purchasing power, and the higher cost of financing has increased the cost of making acquisitions. Escalating inflation and geopolitical turmoil stemming from the war in Ukraine have weakened executive confidence, which is a key driver to M&A. The structural headwinds have pushed many buyers in the private equity industry to the sidelines and have greatly reduced the number of large transformational transactions that led to record-setting M&A in 2021.

Overall M&A activity plummeted in 2022, and a sharp turnaround is not on the near-term horizon.  

Central banks have been raising interest rates to combat inflation. The moves hurt M&A as they led to equity market volatility and increased cost of acquisition financing. Companies have been able to absorb the increased costs on their debt because corporations were flush with cash coming out of the pandemic thanks to government stimulus efforts. However, many have been burning through reserves, and the higher cost of financing will eventually force more sellers into the market.”

World crises driving 'virtually unprecedented' complexity for insurers

The combined effects of economic and geopolitical crises are driving “virtually unprecedented levels of complexity” in the business environment for insurers and reinsurers, according to Munich Re. High inflation is having an especially profound impact on loss expectancy in many operating segments. Also driving the issue are the changing landscapes for risks like cyber and climate change, and the fallout from the COVID-19 pandemic.

In an effort to combat skyrocketing inflation, central banks have hiked interest rates, which in turn can impact the balance sheets of insurers and reinsurers as a result of fixed-interest securities losing value. Rising interest rates can also initially trigger a decline in re/insurers’ capital bases and affect their capacity, despite higher rates having a positive impact on earnings in the medium term, Munich Re said.

Mergers & Acquisitions Forum: Discussion Recap

After an extraordinarily busy year in merger and acquisition activity in 2021, the Business Courier held a forum featuring experts in that space who assessed the current environment for deals and looked ahead to what might be next given the current economic conditions.

The featured panelists were: Kevin Bruegge, a private wealth advisor and managing director of The Evelo|Singer|Sullivan Group wealth management firm; Keith Carlson, managing director and shareholder in VonLehman CPA and Advisory Firm; and Michael Hurley, a partner at Calfee, Halter & Griswold LLP, who practices in the corporate law and finance arena. The forum was held Sept. 29 at the offices of the Cincinnati USA Regional Chamber and was moderated by Steve Watkins, a Business Courier reporter who covers banking, finance, and investments.

Watkins began by noting that 2021 saw $2.6 trillion worth of deals in the U.S., a record. He asked the panelists to comment on what kind of dynamics are affecting the M&A market currently. Hurley commented that this year has still been very strong, but not nearly as much volume as last year. He usually represents companies in the middle-market range, $30 million to $100 million in revenue, who are seeking to do private deals, so broader market forces in the overall economy have not yet trickled down to that level.

“I would say it’s not last year, but it’s still a very good year,” he said.