The M&A market is constantly evolving, and staying informed about the latest trends and insights is crucial for businesses, investors, and deal professionals. To shed light on the current state of the market, Robert Connolly, a partner at LP’s Corporate Practice Group, has engaged in a series of conversations with M&A experts. In this article, we delve into his discussion with Gary Grote, Managing Director at Bridgepoint Investment Banking, who specializes in capital raising and M&A advisory solutions across various industries.
Current State of the Market
Gary Grote provides valuable insights into the financing landscape for lower middle market deals. He highlights the shift towards private credit solutions due to the conservative nature of commercial banks and the impact of interest rate increases. Grote explains how the cost advantage of commercial banks has diminished, making private credit options more attractive despite higher interest costs. This trend has led to a significant increase in businesses exploring private credit solutions for M&A transactions.
He also discusses the sources of capital that are more active in this space, such as mezzanine debt and sub-debt facilities, alongside the impact of changes in interest rates on deal financing and structures. Grote emphasizes the importance of additional sensitivity analysis and increased protections through structured deals in response to fluctuating interest rates.
Valuation and Pricing
Grote delves into the factors driving valuation multiples in the lower middle market, highlighting the impact of leverage and private equity exit activity. He notes the divergence by sector in valuation multiples and the influence of private equity fundraising on M&A activity. Grote also touches on the dominance of roll-ups in the lower middle market and the shift in buyer dynamics towards strategic buyers.
Buyer and Seller Dynamics
The discussion extends to buyer-seller dynamics, where Grote observes a more rigorous diligence process and protracted timelines due to economic uncertainties. He notes a lack of urgency related to the upcoming election, signaling a more stable market environment for deal-making.
Process and Strategy
Grote shares best practices for conducting due diligence in the lower middle market, emphasizing the importance of pre-market preparation and disciplined processes to ensure quality assets in the market.
Market Outlook
Looking ahead, Grote predicts a gradual return to normalized activity in 2024, with increased M&A activity expected in 2025. He discusses the impact of limited partner demands for a return of cash on private equity exit activity and the demographic factors driving M&A transactions.
Reflection and Insights
Grote reflects on recent deals that exemplify the current state of the lower middle market, showcasing the impact of rising rates and leverage on deal outcomes. He emphasizes the importance of having a quality asset in a sector of favor to achieve premium valuations in the market.
In conclusion, the insights shared by Gary Grote provide a comprehensive overview of the evolving M&A market, offering valuable guidance for businesses, investors, and deal professionals navigating the complex landscape of deal-making.
